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Capital markets: Quarterly trends update 2021 Q2

13 May 2021

Cliff Pearce

Global Head of Capital Markets, Group

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Cliff Pearce

Global Head of Capital Markets, Group

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Welcome to the second quarterly trends update for 2021. Read on for incisive and topical insights from our capital markets team.

In this issue, we explore the SPAC boom that’s sending shockwaves around the world; signs of strength in the global ABS market; and what’s next for ESG.

This quarter’s top stories

Read on for our top three trends affecting capital markets around the world…

SPACs wave hits European shores

The US traditionally dominates in the world of SPACs (special purpose acquisition companies); but this craze for the so-called blank cheque companies has now spread to new shores. Euronext in the Netherlands has become the exchange of choice for SPACs, with dealers and bankers attracted by its liquidity and flexible listing rules. We at Intertrust Group have closed three deals in this jurisdiction so far this year, mandated on another 28 and there’s a further 40-plus in the pipeline.

In recent weeks, we have seen eyes turn to the UK market and expect a wave of interest when the rules in this jurisdiction are amended. The Financial Conduct Authority (FCA) aims to implement new guidance on SPACs by early summer. One of our clients intends to list before the rules are changed and we know others are primed to move as soon as they are altered. Enquiries are coming from seasoned veterans of the US SPAC market, attracted by Europe’s less mature versions and the opportunities they offer.

The International Stock Exchange (TISE) has also set itself up for SPACs, but hasn’t seen the same level of activity as other jurisdictions. If a SPACs team is looking for a solution that doesn’t require the same level of liquidity that some others do, then TISE is worth considering. We can act as both a listing and a transfer agent for SPACs on TISE.

Healthy issuance of catastrophe (CAT) bonds

There have been strong issuance levels so far this year in CAT bonds, probably the best known part of the insurance-linked securities (ILS) market. Investors have money to invest and are attracted by the returns that CAT bonds are offering compared to other financial markets.

In the CAT bond market, there are four strong jurisdictions: Bermuda, Singapore, Ireland and the UK. Intertrust Group covers the latter three.

Singapore issuance has been particularly strong. This follows the extension of the ILS grant scheme to the end of 2022. The scheme aims to fund up to 100% of upfront issuance costs of catastrophe bonds in Singapore. Hong Kong is planning something similar.

The UK CAT bond market has stalled a little lately, amid regulatory concerns which have arguably been overdone. The UK’s HM Revenue & Customs has launched a consultation on the tax treatment of ILS to make the UK ILS regulatory and tax regime more competitive.

The market for captive insurance (when a company is set up by its owners to insure the risk of its parent or subsidiary) has been buoyant, benefiting from the hard insurance market. This is when there is strong demand for insurance coverage and premium rates rise. Intertrust Group has had a presence in Guernsey, Europe’s leading captive insurance domicile, since 1952.

Environmental, social and governance (ESG) growing in importance

ESG remains top of the agenda. There was more encouraging news from the US, where President Joe Biden pledged that by 2030 greenhouse gas emissions will be cut by between 50% and 52% of their 2005 levels.

Within capital markets, the first three months of 2021 marked a record quarter for sustainable debt, with $378bn of new sustainable debt issued, according to a report from Swedish bank SEB. That represents 50% of the volume in the market for the whole of 2020. The first-quarter issuance of sustainability-linked bonds was more than 10 times higher than in the same quarter last year, SEB said.

As a leading provider of capital markets services, Intertrust Group can partner with issuers and investors to help them meet the demands and take advantage of the rising importance of ESG.

Intertrust Group handled Euronext’s first ESG-based SPAC, ESG Core Investments, in February. The €250m offering, sponsored by Netherlands-based Infestos Sustainability, will focus on sustainable opportunities in north-west Europe.

Market round-up

Also in the news this quarter…

Strength in asset-backed securities (ABS) market

The ABS market had a strong first quarter in Europe as hopes grew for an end to the Covid-19 crisis. Securitised product issuance rose 53% against the same quarter last year to €60.6bn, according to figures from ConceptABS. UK buy-to-let/non-conforming ABS and arbitrage collateralised loan obligations (CLO) represented 32% of total issuance in the quarter.

Our teams saw a reasonable deal flow in both February and March. April has also been trending in the right direction. It comes after a year when the ABS market was down about 15% compared with previous years, hit hard by the impact of Covid-19.

We note that the UK has seen a good proportion of recent deals. UK issuance amounted to €20bn in the first quarter, up from €16bn, largely due to the €5bn issuance by MBNA in March 2021.

With the rapid rollout of vaccines, people are starting to hope that the end of Covid-19 is in sight and this is supporting sentiment in the market. There is pent-up demand and issuers are keen to get deals done. There have also been signs of strength in the US ABS market. Data from SIFMA shows issuance of ABS rose to $27.8bn in March 2021, that’s up from $14.2bn in the same month last year and shows a marked increase on the $23bn recorded in February 2021 and $13.2bn recorded in January 2021.

Activity revs up for end of LIBOR

The end-of-year deadline for the cessation of the use of LIBOR (London Interbank Offered Rate) is fast approaching and the industry is busy preparing. The FCA confirmed the timeline for the end of LIBOR on March 5, sparking a flurry of activity, especially within the residential mortgage-backed securities (RMBS) market.

The issue of so-called “tough legacy” LIBOR contracts remains. These are those that are especially difficult to amend before the end of LIBOR. The FCA is consulting on using proposed new powers (that the government is legislating to grant it) to require continued publication on a synthetic basis for some sterling LIBOR settings and for one additional year for some Japanese yen LIBOR settings.

Any synthetic LIBOR is intended for use in tough legacy contracts only, the FCA has said. It is consulting on which contracts will be allowed to use a synthetic LIBOR rate.

We at Intertrust Group are seeing strong demand for our tabulation agency services amid the repapering of contracts. Our scanning software solution can tell issuers which contracts need to be amended. We are also seeing demand for our investor identification services as issuers seek to engage investors in these difficult discussions. And we have plenty of capacity to help others with this service should they require it.

Digital assets everywhere

Headlines about bitcoin and blockchain seem to be ubiquitous lately as consumer and institutional interest in cryptocurrencies grows.

We are seeing interest from clients. We currently have four live deals that are investing in crypto as an asset class. Three of them are actively managed certificates (AMC), which are debt instruments holding a portfolio of underlying assets. Investors know what they’re investing in, they are constantly tradable and there is an asset manager who is buying and selling assets on behalf of note holders.

The big change we are seeing is a shift in crypto custody. It’s moving from being purely dominated by fintech to there being more involvement from banks. Banks are starting to look at the custody space.

Looking ahead

We’ll be keeping an eye on these trends over the coming months…

Asian aviation expected to recover faster than US and Europe

While international passenger traffic remained dismal among Asian airlines during March, there are reasons to be hopeful. Travel bubbles are starting to form: Singapore and Hong Kong start quarantine-free travel between their airports from May 26.

We expect Asia’s aviation industry to bounce back faster than the US or Europe. Domestic travel has kept going in some countries and we anticipate a swift resumption of business travel and short holidays once more than 50% of Asia Pacific (APAC) countries have removed border controls.

The first half of 2022 is likely to be crucial, in terms of gauging how effective vaccinations are in reducing Covid-19 cases and whether the APAC aviation sector will recover in the second half of 2022.

SPACs frenzy: next stop Singapore?

We expect the SPAC craze to spread to Asia. The Singapore Exchange has been consulting on a listing framework for SPACs and has already published what it expects it to look like. It has proposed a minimum market capitalisation of $300m Singapore dollars and up to three years for SPACs to combine with a target. The consultation closed on April 28. Asian interest in SPACs is growing.

Indonesia’s exchange is exploring allowing SPACs and Hong Kong is also reported to be preparing to create a framework for SPACS.

Calls for better ESG data on ABS

The absence of third-party ESG data for the ABS asset class, and the subsequent lack of standardised and relevant data, makes it hard for investors to judge ESG risks and meet sustainability objectives. But efforts are being made to tackle this. The International Capital Market Association Asset Management and Investors Council (ICMA AMIC) has set up a working group to discuss the issue. We expect market and regulatory drivers to gather pace in this area as ESG becomes an increasingly important issue for all types of investors.

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