According to her New Year message, the Prime Minister, Theresa May, expects Britons to feel renewed confidence and pride in 2018.
You may have noticed that Mrs May’s expectations are not always realised, but hopefully banks and other debt investors will be starting to consider new mandates in the months ahead. What common themes do we foresee for the loan markets? Here are our five top tips.
Tip 1: Interest rate provisions will attract increasing attention
Since Andrew Bailey, Chief Executive of the Financial Conduct Authority, first announced plans to consider potential alternatives to LIBOR in July last year, there has been widespread speculation around what might replace LIBOR. It seems possible (although not yet certain) that LIBOR will cease to be available after 2021. As such, LIBOR-based products entered into now but which mature after 2021 should (we recommend) make provision for alternative fallbacks where LIBOR is no longer available. LMA documentation already contains a series of such fallbacks (including to interpolated rates, historic rates, reference bank rates and cost of funds) but this may not be the case in bilateral loan documentation. Beyond this, other questions for consideration include whether, on syndicated deals, an unavailable screen rate (such as LIBOR) can be replaced with majority lender consent alone and, if so, whether the majority lenders should also have the ability to approve a change in the related margin (to deal with any economic differential as a result of using an alternative benchmark rate).
Tip 2: Brexit jitters will never be far away
Much as we might wish to put our heads in the sand over Brexit, unfortunately those who do so are likely to get more than a stiff neck. It’s beyond the scope of this note for us to major on these risks. However as we get closer to understanding more precisely what Brexit means, then loan market participants are likely to want to re-visit their loan documentation to deal with any necessary updates to reflect any UK withdrawal from the EU. Potential changes may extend to any references to the European Union itself or to EU legislation (for example, in COMI representations, increased cost provisions and VAT clauses). Governing law and jurisdiction clauses may need to be re-visited to the extent loans are entered into with EU borrowers. “Article 55” bail-in language may need to be incorporated into English law loans advanced by EU financial institutions. Beyond the documentary concerns, the loss of passporting rights, which allow British banks to serve clients across the EU without the need for local banking licences, is one potential consequence of the UK’s Brexit decision. Until such matters have been finally resolved, lenders will need to be alive to the ways to address such risks in loan documentation.
Tip 3: The European leveraged market will likely remain buoyant
2017 saw a huge amount of appetite for European leveraged loans with many traditional lenders competing against other investors for opportunities. The result was a supply/demand imbalance and an exceptionally borrower-friendly market. Loan pricing and leverage levels reached 2007 levels. “Cov-lite” term loan B facilities, first embraced in the US, started to emerge in Europe. And credit portability (enabling borrower groups to undergo a change of control without triggering a mandatory prepayment requirement) has crept into some corners of the market.
The question then is how long can the good times last for the European leveraged loan market? Generally speaking, Europe seems to be in a happier place than it was twelve months ago and there is still likely tolerance for more new debt. However whether issuers can continue to command favourable terms will be something that will be interesting to watch as the year progresses. Lenders and other investors will need to be careful to properly diligence potential mandates and not simply jump into bed at the first opportunity to get ahead of the competition.
Tip 4: Think green
There has been a huge amount of recent interest in all things green, what with Blue Planet II airing on our screens in December, predictions that 2018 will mark a turning point for single-use plastic water bottles and uproar over China’s recent ban on importing our plastic waste. So will 2018 be the year when green bonds storm the market?
There is no statutory test to determine what constitutes a green bond. Structured in the same way as conventional bonds, the major distinguishing characteristic of green bonds is that the proceeds are used exclusively to finance projects with some kind of environmental benefit. The green bond market has been around since 2007 and was first dominated by multilateral development banks. The first corporate green bond issuance was in 2012 and since then large corporates including Apple and SSE have issued their own green bonds. 2017 saw total green bond issuance exceed the US$100bn mark for the first time, with significant issuances by sovereigns including China and France.
It seems likely that the green bond market will continue to attract increasing demand in 2018. Until now they have been priced at similar levels to ordinary bonds at issuance, but there is increasing evidence to suggest that they are outperforming regular debt issued by the same entity in the secondary markets.
Tip 5: Expect a steady flow of refinancings
In November 2017, the LMA surveyed its membership on the outlook for the syndicated loan market over the next 12 months. Among the questions asked of members was the following: next year, where do you think the best opportunities will lie in the loan markets? 37% of respondents (up from 27% in 2016) indicated that they expected the best opportunities to lie with refinancings, with corporate M&A (24.4%) coming next, followed by the leveraged market (18.4%), emerging markets (10.7%) and finally restructurings (9.5%). This wasn’t necessarily hugely encouraging, especially if the market wants to meet or exceed this year’s budgets. However it is consistent with the last year or so where investors have struggled at times to invest new money in the face of a steady flow of refinancings and amend and extends. It seems that this year we can expect more of the same.
As ever, Stevens & Bolton remains ready and willing to help its clients navigate whatever opportunities and challenges 2018 brings – do get in touch if we can be of any assistance as the year progresses!