This article looks at trends, including the response to COVID-19, which we expect to impact the mid-market in 2021.
Last year we gave COVID-19 a quick mention in our ‘look at the year ahead’. Nobody foresaw the impact it would have. As the market enters a new year, there remains the uncertainty that we’ve grown familiar with. However, with the vaccine roll-out underway and our understanding of the virus’ impact continually improving, forecasts can now be more accurately revised. We should see some level of recovery by the end of 2021, but the levels of activity and growth seen in 2019 remain a distant memory, for now.
The initial shock of COVID-19 was not felt equally across sectors or regions and nor will the recovery. Internationally, it’s expected that emerging and developing economies, which were hit harder and faster by the virus, will have a quicker recovery. It follows that the UK may experience a slower rebound.
There will be an element of catch-up for some industries, as supply chains are stitched back together and lockdown eases. In manufacturing, where effective social distancing has been challenging, productivity should quickly return to pre- COVID-19 levels. There will likely be pent-up demand for some industries, including leisure and travel which have been some of the hardest hit – sadly, with the loss of several household names. There are also businesses that have flourished as a result of the changed market that we are now operating in.
M&A levels and terms
‘Traditional’ growth and investment M&A has had a quiet year. It’s incredible how our market has turned its attention to mobilising the British Business Bank, changing policies, procedures and working practices and harnessing the goodwill and trust within existing relationships to provide short-term liquidity – with a focus on honouring existing relationships rather than traditional origination.
The coming months are likely to see a refocus: a need to refinance and restructure short-term ‘sticking plaster’ debt products. They may also provide reactionary M&A opportunities for the ‘COVID-19 winners. This should result in efficiencies for businesses in the longer term but has the potential to impact redundancy levels in the short-term.
The market is liquid and competitive terms are still being driven as a result, although we’re yet to see any major change in covenants. It’s possible that this is a deferral, disguised by a need to ‘get the deal done’ in recent months; lenders and sponsors may take a more cautious approach as the global economy recovers.
December 2020 saw the return of Crown Preference. As a result we’re seeing lenders analyse more carefully whether fixed security should be taken over particular assets, including on what would typically be straight ‘cashflow’ lends.
Technology and innovation
There is a clear disparity between those businesses that were prepared or have adapted to the ‘new normal’, and those that have not. This polarisation will only broaden as those developing, operating and effectively adopting new technologies accelerate the arrival of the future. We’re seeing a real willingness to understand and support development and innovation in the technology sector, across the board.
The optimism around technology will accelerate investment in that sector, and those of us working to support that growth will need to continue to learn and adapt quickly.
There will be impacts for market stakeholders, but for now it’s the businesses we service who are on the frontline and will be feeling the immediate practical effects. If nothing else, Brexit has the continued potential to consume management time and resources, as new policies and procedures are implemented.
However, an agreed Brexit deal, coupled with the US election result, should provide a level of political certainty not seen in recent years. Of course there will be hotspots, including the German elections, but we may see transatlantic deals return.
LIBOR to SONIA
2021 represents the last full year of LIBOR: we have a timeline and an (almost) agreed endgame for LIBOR’s departure but the immediate future remains uncertain. Many lenders are still finalising their SONIA packages. The nuances around credit adjustment spreads, observation shifts and other concepts we hadn’t heard of until 2020 are still being considered, with back-office teams crunching numbers.
Effecting the transition is likely to be the greater hurdle, with no one-size-fits-all for documenting the shift in either new or existing products. The LMA exposure drafts have been a huge help, but are designed to slot into freshly documented investment grade facilities. Moving existing loan books from LIBOR to SONIA will be an enormous challenge during 2021.
Regulation and sustainability
To some extent, COVID-19 has already kickstarted a reduction in regulation, and at speed. This momentum is likely to continue in certain areas to help aid recovery, both from COVID-19 and Brexit. If a recovery is in train by the end of the year, we might start seeing the detail of the tax changes we know will be required post-COVID-19. There will undoubtedly be plenty of speculation over coming months.
In other areas, particularly diversity and sustainability, we may see increased regulation as the government looks to ensure that both are at the core of business decisions. Performance in both areas could feature more heavily in statutory reporting in coming years to ensure they are genuinely central to how businesses are run.
‘Green’ lending is becoming a bigger feature in many markets, and that trend is likely to follow in the UK as stakeholders feel the pressure from regulation, taxation and their own investors. We expect sustainability linked KPIs, margin ratchets and covenants to feature more heavily by the end of 2022. The COVID-19 recovery will likely draw attention away from these terms in the interim and may buy time for us to agree how we will quantify and test these concepts within documentation.
2021 will not be easy and we face challenging months ahead, especially as government support schemes end. But there is also optimism in the market. Vaccinations should bring with them light at the end of the tunnel. Together with a post Brexit trade deal, a new US president and an understanding of how quickly we can adapt and innovate when we need to, we should see some uptick by the end of the year. If we can channel the same energy into sustainability and diversity, the years ahead will see some real positive change.