2014 saw two competing trends - increased market optimism alongside increased regulation. M&A, and expansion of existing businesses have been firmly back on board room agendas and that energy in the market has often been supported by external finance.
We expect to see growth continue into 2015. 45% of respondents to the November 2014 LMA survey anticipate volume growth of 10% or more in the primary syndicated market in 2015.
This article considers market trends we have seen develop over the last twelve months, as well as developments in law and regulation which will continue to impact lenders in the year ahead.
Market and competition
Range of financing
The previous downturn has forced the market to be more resourceful and innovative in their approach to financing. Borrowers and lenders have been required to look at a broader range and mix of financing arrangements. We now regularly see a mixture of term debt alongside asset backed or invoice financing.
The same pressures provided an opportunity for alternative finance providers to come to the fore, and we are seeing more non-bank lenders providing more traditional term debt than we have done previously (eg. unitranche, funds). We would expect this rise in non-bank lending to continue over the next five years. 2014 also saw much more competition amongst lenders to get involved with strong businesses - that continued competition is likely to influence the loans market and the terms available to successful borrowers.
As you would expect, the changes outlined above have led to increased borrower confidence. This means we are seeing more 'new money' lends than we have done in a long time (rather than simply refinancing) and the buy and build facilities which are being put in place in the private equity market should allow for a steady flow of M&A activity through the coming year.
Many large corporates have taken advantage of their place in the market and have refinanced on more preferable terms over the last year or so. It is possible that the mid-market corporates will continue to look for reduced pricing/longer tenors over the coming months, although this may well start to slow down, particularly ahead of the general election.
Real estate arguably took the biggest knock after the initial downturn, and many would say it has been the slowest area to fight back. The majority of traditional lenders have been keen to reduce real estate portfolios in previous years and those holding on to their bricks and mortar haven't been able to be as flexible and forward thinking as those with intangible assets.
It appears that this is starting to change and we expect to see the upturn spread from London to other areas of the UK in the next year.
Regulation and control
There have been a number of recent legal and regulatory developments which have put pressure on lenders. Some of these have hit the headlines (such as LIBOR) and others have been developing over a number of years (such as the Basel framework). Others have been less obvious but are equally indicative of a change in the market, prescribing much more carefully how entities can lend and the issues they need to pre-empt when doing so.
The recommendations made by the ICB (led by John Vickers) in 2010 in the context of de-risking the banking industry have now come to life in the form of the Financial Services (Banking Reform) Act 2013. The ringfencing of retail banking and investment banking that this will lead to can be lauded for its aim of long term stability and de-risking the banking market but it will involve a very significant re-organisation of many banks in a relatively short space of time (2019 is the expected deadline).
Whilst only a minor change in terms of documentation, the decision by the competition authorities that specifying a pre-approved list of auditors in loan agreements is anti-competitive illustrates how far reaching competition law can be. The authorities are looking at the nitty gritty of the agreements we see every day, as well as the 'bigger picture issues' that hit the headlines, and are willing to extend their arm to matters which have been considered the norm in the market for many years.
Global and geopolitical risks are likely to have a significant impact on the market in the next year. Whilst these are ever changing, there are certain industries and jurisdictions which all lenders are keen to avoid a connection with, and we have seen specific provisions developed over the last twelve months for inclusion in finance documents (around anti-corruption law and sanctions) which are now considered by many lenders to be standard.
Regulation - 'UK FATCA'
The Foreign Account Tax Compliance Act (FATCA) is a US statute which (ultimately) requires financial institutions (outside of the US) to provide information on US companies or companies with a US connection to the US authorities. FATCA's aim is to reduce tax evasion and failure to comply results in a withholding tax on amounts paid from US income.
The UK already has an agreement with the US which allows HMRC to provide the information to the US (to avoid resulting breaches by financial institutions of data protection and confidentiality laws). The LMA has provided wording to be included in facility documents, and there is a generally agreed approach on who takes the risk of that withholding occurring across the market.
In respect of 2015 onwards, financial institutions in crown dependencies and certain overseas territories (such as Gibraltar) will be required to provide information on UK resident clients akin to the information required to be disclosed under FATCA. As well as an automatic information exchange, a disclosure option is available to those who wish to correct matters with HMRC before their information is shared. This obligation is imposed on the financial institutions in those other territories rather than in the UK, and there is a catch up period which runs to the middle of 2016.
Given the perceived success of FATCA it seems likely that other jurisdictions will introduce similar legislation over the coming years.
The year ahead
After a successful 2014 most are quietly confident about the year ahead, but remain very aware that the market remains fragile. We expect to see some growth next year, but as the IMF have lowered growth forecasts, and with various international tensions increased and a general election looming, it is quite possible that we will not see the same speed of growth as we did last year.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.