Jonathan Porteous' half-term report

Earlier this year, I put my neck on the line by forecasting my top tips for the loan markets in 2018. It's this sort of behaviour that sets a Stevens & Bolton lawyer apart from the average lawyer - a willingness to opine rather than simply report. With summer fast approaching and in this era of 24/7 self-reflection, it seems only right that I pause for a moment to assess whether the facts to date have chimed with my predictions. 

Before delving further, a quick reminder as to what I foresaw. You can click here to check for yourself, but as a quick summary you'll recall I made five predictions as follows:

  1. Interest rate provisions to attract increasing attention
  2. Brexit jitters would never be far away
  3. The European leverage market would remain buoyant
  4. Think all things green
  5. Expect a steady flow of refinancings

So how have I got on so far? Here goes...

Well in no particular order, on tip (4) I seem to have hit the ball straight out of the park. On 21 March this year, the Loan Market Association (LMA), in conjunction with the Asia Pacific LMA, published the Green Loan Principles: Supporting environmentally sustainable economic activity. These principles set out a framework of market standards and voluntary guidelines that participants are encouraged to adopt across the wholesale green loan market. They build on the International Capital Market Association’s Green Bond Principles and focus on four key elements: (i) the use of proceeds on “Green Projects”; (ii) the process for project evaluation and selection; (iii) the management of proceeds and (iv) reporting. Taken together, these principles highlight the growing interest of loan market participants in green loan products. And before moving on, we can expect to hear soon from the Green Finance Taskforce, the body launched by the UK Government in October last year and which is expected to report on its recommendations on how to accelerate the growth of green finance.  

I think I’ve done pretty well on tips (1) and (2) too, although to be fair I wasn’t being particularly outlandish when I made these predictions. For those of you with access to the LMA’s website, you’ll see that it now boasts two entire microsites dedicated to all things LIBOR- and Brexit-related respectively.

As regards the replacement of LIBOR, treasurers may be interested to know that in March this year the LMA, together with the Association of Corporate Treasurers, published a joint guide on LIBOR benchmark reform entitled The future of LIBOR: What you need to know. Also worth a read if you’ve developed a passion for LIBOR change is the speech given by Andrew Bailey, Chief Executive of the UK’s Financial Conduct Authority, on 1 March 2018, in which he touched on the latest developments regarding LIBOR. From this it seems we are still a little way off right now on identifying what will replace LIBOR, but that momentum is still heading in the direction of change. This is illustrated for example by the formation of the Alternative Reference Rates Committee by the Federal Reserve Bank of New York, which has already identified the Secured Overnight Financing Rate (or SOFR) as a potential candidate for LIBOR replacement for certain US dollar financial contracts. For the time being, most loan documentation will we expect continue to adopt a halfway house approach of enabling the use of LIBOR with alternative fall-back rates where LIBOR ceases to be available. So no need for lenders to panic right now.

So far as Brexit and the loan markets are concerned, personally I think the less said on this the better. But on a more positive note, there has been some recent evidence that common sense might be starting to prevail at least in some quarters. For example, the UK Government announced plans to provide a temporary permission scheme for EEA firms to passport into the UK for a prescribed period of time post-Brexit. Separately, in March the UK Government and the European Commission published a draft withdrawal agreement which, among other things, contemplates ongoing judicial cooperation between the UK and EU in civil and commercial matters. Specifically, the agreement provides that the Recast Brussels Regulation (1215/2012 EC) relating to jurisdiction and the recognition and enforcement of judgments will apply to the enforcement and recognition of judgments given in legal proceedings which commence before the transition period ends. To my mind, both these developments demonstrate an inability to see the wood from the trees, or perhaps a begrudging acknowledgement that we really were better off where we were before.

And finally on points (3) and (5), well suffice to say that our experience to date in 2018 indicates that again I am bang on the money. It’s just a shame that I can’t share the details with you to explain more fully. It’s a sort of “dog ate my homework” kind of response, but hopefully you’ll appreciate where I’m coming from. But in terms of the European leveraged loan market, I think it’s fair to say that whilst interest in such deals remains buoyant, there has been a relative shortage of such deals and a supply-demand imbalance. In the immediate short-term, we can likely expect this to favour leverage loan borrowers who seek greater flexibility in covenants and loan terms generally.

To sum up then, not a bad performance overall but I could perhaps do better. Let's see if the remainder of 2018 reflects better or worse on my crystal-ball gazing capabilities. 

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Jonathan Porteous

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