2015 saw a year of growth - after a quietly confident start, the market gained momentum following the election and growth across the sectors continued into the fourth quarter.
The Grant Thornton/ICAEW UK Business Confidence Monitor suggests that businesses are starting 2016 with optimism, although they are more cautious about their growth forecasts than they have been in very recent years. We expect the mid-market banking & finance market to follow the same trajectory; continued growth at a slightly slower pace. This article will look at developments in law and regulation which we expect to impact lenders in the year ahead.
Bank restructuring & competition
The Financial Services (Banking Reform) Act 2013 will require (amongst other things) the ringfencing of retail banking and investment banking by 2019 and so we expect to see banks increase their focus on their own structures in the coming year.
Requirements for banks to hold increased levels of loss absorbing and regulatory capital will no doubt continue to drive competition to lend to strong business customers, as well as the willingness of bank lenders to provide innovative and flexible financing packages for those customers.
This drive will be further boosted by the mid-market's increased access and exposure to funding from non-bank lenders such as insurance led lenders, crowd funding and peer to peer arrangements which have come to the fore to compete with the other investment companies in the market, as well as the new entrants to the banking market.
Regulation - tighter controls
2015 saw an increase in geo political tension across the Globe, and there is no doubt that the uncertainty that this brings will continue to impact generally on UK businesses.
We are already seeing lenders react to the sanctions and anti-corruption regimes in the form of additional provisions in loan documents and additional checks before lending. These provisions are often heavily negotiated because they are so far reaching and difficult for borrowers to ensure compliance with. We expect that the next 12 months will see the banks become more willing to tailor these provisions to the business in question and the LMA has suggested that a move away from a resulting event of default, to a mandatory prepayment event is being considered, at least for investment grade borrowers.
The Modern Slavery Act which was introduced last year will require many businesses to issue an annual statement and ensure they are generally more transparent in terms of the potential risk of slavery becoming an issue for them or in their supply chain, and the steps they are taking to combat that risk. This will represent a big challenge for the businesses affected, including lenders.
Along with the Bribery Act, The Modern Slavery Act requires businesses to take positive steps to ensure compliance, and indicates a move away from self-regulation by corporates. Lenders are increasingly aware of the negative impact any failure to comply would have on the businesses they finance.
We expect to continue to see increased reference to these regulations in loan documents during 2016 and a heightened awareness of the potential consequences amongst bank and non-bank lenders, particularly in certain sectors. We shouldn't forget that the banks themselves are also required to comply with these requirements and are exposed to enforcement action by authorities which means this is likely to remain a hot topic through 2016.
Confidence in the banks
Competition between the banks remains strong, pricing continues to be very competitive and the banks are offering much more flexibility around certain provisions in loan documents which were, immediately after the crisis, considered non-negotiable. For example in mid-market acquisition finance documents we have seen the return of the white list, the declared default concept, equity cures becoming more flexible and various other 'standard' definitions being negotiated.
The turn of the new year saw the banks receive another boost - confirmation from the FCA that they will not be undertaking a review of 'banking culture' and will instead "engage individually with firms to encourage cultural change" and, assuming this engagement is successful, true organic change in banking culture should further increase public confidence in the traditional bank lenders.
Interest rate changes and LIBOR
LIBOR has changed significantly since the initial rate rigging scandal, and is set to evolve further over coming years. It is intended that LIBOR will eventually be based, as far as possible, on data from real transactions in order to reduce subjectivity within the rate setting chain.
However, there is still an awful lot of work to be done: the process will need to cater for situations where there is no or insufficient data to set a rate and it seems likely that 'expert judgement' will need to provide a last resort in these situations (although how this would work in practice still needs to be established).
The IBA is set to publish a roadmap for LIBOR during 2016 which may indicate how and when the new LIBOR will become effective - and may also help lawyers analyse whether or not existing LIBOR definitions will need to be further amended.
The Brexit referendum
After the Scottish independence referendum and the general election, one major uncertainty remains - UK's membership of the EU. The new government has promised an in/out referendum which could take place as early as June 2016.
The potential impact on UK businesses has been and will continue to be widely debated and whilst it seems that in the main, business leaders are keen to stay 'in', the voting public are very much undecided.
The uncertainty caused by the speculation about both the timing and the outcome of the referendum, and the way in which that outcome may impact on our financial services sector and economy generally, is likely to have a negative impact on the market, at least in the short term.
Regulation and compliance will remain key themes applying both to bank lenders and new entrants to the market during 2016 amid an economic climate that remains uncertain. Whilst businesses may turn some of their focus to these and other changes in the market, we still expect to see new lends, M&A activity and some growth in the mid-market during 2016, rather than reliance on refinancing and restructuring as was the case immediately after the recession.
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.