THE ECONOMICS OF THE PRIVATE MARKET
Prospects for Development
Because it has filled a gap in U.S. capital markets, the underwritten 144A market appears likely to undergo further development and growth. Before the adoption of Rule 144A, no market existed that could accommodate large issues that were unsuited for the public market but did not require an information-intensive market. Issuers of this nature, whether domestic or foreign, had no choice in U.S. markets but to accept the terms of the private market. Although such issuers often did not have to tolerate restrictive covenants, they had to pay a premium over public bond rates because of the lack of liquidity in the private placement market. By increasing liquidity, Rule 144A has reduced the premium and has thus increased offerings by such issuers.
In being both non-information-intensive and private, the 144A market represents a new bond market. Whether the need for such a market extends much beyond current levels of activity is an open question. The midsized, informationproblematic firms, which issue in the traditional market, will probably not move to the 144A market. They must borrow from a financial intermediary and often do not want their issues to be traded in a liquid market to investors that might not understand their particular circumstances.
Perhaps, the greatest potential for the 144A market lies in its use by foreign issuers, inasmuch as they represent the largest group of borrowers with no previous satisfactory alternative in the United States. If foreign issuance expands significantly, Rule 144A may prove helpful in integrating world capital markets. Borrowing by large, domestic corporations with specialized requirements seems to offer much less potential, as such borrowing constitutes a small share of the credit needs of large corporations. If, however, the liquidity of the 144A market increases so that yields in the public and 144A markets are roughly the same, a considerable portion of public market borrowing may shift to the 144A market, which would offer lower borrowing costs overall because of the absence of registration costs.