Where next for the syndicated loan market?
Where next for the syndicated loan market?
From Libor, global trade wars and Brexit, to ESG and quantitative easing (QE), Associate Director - Product Development, Sinead McIntosh provides an overview of the key discussion points from the Loan Market Association's (LMA) Syndicated Loans Conference in London in September…
In stark contrast to the torrential rain outside, the impassioned shouts of the Brexit protesters across the road at Westminster and the latest twists in the Brexit saga; the panellists and delegates at the LMA Syndicated Loans Conference were composed, considered and largely unified in their view on the state of the market, the challenging headwinds and their somewhat surprising optimism for growth.
Following LMA Chief Executive, Clare Dawson's opening address covering key market influencers and the ensuing panel discussions debating their respective impacts on loan activity, my top take-outs were…
Libor, Libor, Libor
So, the Libor replacement keeps the top spot for the issue of draining the life blood out of every lawyer, transaction manager and business head in the loan market. Despite the best efforts of working groups who continue to toil away to try and find conceptual solutions, the harsh reality is that the proposals being tabled are operationally impossible for corporates to put into practice. It is inconceivable that the three to six month post-rate fix period they currently have to manage invoicing, suppliers and cash flow could be reduced to one day; their treasury management would simply collapse.
There is some good news on the Libor front, however. The Libor replacement transition end is not until December 2021, so there is still plenty of time to discuss solutions. The bad news is that there is still plenty of time to discuss Libor replacement...
A world of uncertainty
No conference is complete without an economic snapshot. The job fell to ING economist, James Smith who did a fantastic job of summarising - in quite animated fashion - the impact of Brexit and the US-China trade war; so much so that you almost forgot how mentally fatigued you were by both topics.
So how is the global economy impacting the loan markets? Parking Boris and Trump for a moment and looking at policies rather than people, QE is the obvious factor impacting the loan market. Ten years of QE in the US has driven long term low yields, disincentivising banks from lending. The ECB has joined the party too, reducing deposit rates to -0.5% and consequently reducing the appetite for lending across the pond. Several panellists also commented on the impact of negative rates. Interestingly, we have yet to see a loan with negative yield even though we have in the bond market.
ESG: an exercise in PR?
Aligning with environmental, social and governance factors is still a hot topic prevalent throughout most markets, with lots of parties earnestly citing it as a core strategy of their firms. However, the reality for most is that it is not part of institutional DNA. In the absence of KPIs and commercial repercussions for not reaching ESG targets, it largely remains an exercise in PR.
The Brexit effect
The loan markets are inherently driven by M&A activity and whilst the US has seen strong activity in large scale M&A, the European market is barely breathing. Only one deal has surpassed the EUR 10 billion mark compared to seven in the same period last year. As a result, activity in the loan market has been severely hampered.
The rise of the P2P
Performing more strongly are Collateralised Loan Obligations (CLO), with more closing year-to-date than in the whole of 2018 and yet more money is coming in. The absence of M&A has also prompted the rise of P2P (public to private) buyouts. However, whilst growth in this market is significant with an influx of private debt, these deals hoover up man hours and frequently don’t make it to execution. It is a strategic play for many firms if they want to make that relationship call with the sponsor.
What next for the market?
Volumes are year-on-year down 30%, deals are down 25% but liquidity is very high. The optimists in the room bestowed the virtues of high liquidity, the growth of niche markets and the M&A bounce-back expected if there is a US-China trade deal. Whilst everyone tried to position themselves as an optimist, they were somewhat outnumbered by the realists in the room who decried the commercial handcuffing of Libor, global trade wars and QE.
With QE set to continue and general elections in the US and UK; I'm not hanging my hat on an uptick in deals anytime soon. However, while the global economy fights to right itself and the industry wades through the regulation, perhaps there's a window for ESG to become embedded in our DNA, so when the resurgence does come, ESG will be an integral part of our market and not window dressing.
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