Director, Business Development | Europe
By Kate Lagoe
Associate Director, Business Development | Europe
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Hosted in London by Allen & Overy, the Loan Market Association (LMA) Loan Operations Conference was well attended by operations and other loan market professionals from across the industry. The half-day event touched on topics including pandemic learnings and secondary market settlement times, LIBOR discontinuation, and agent landscapes. There were also discussions about facility documentation, and its impact on agent efficiency in future transactions, particularly in Europe where loan documents are often more bespoke and less standardised than in the US.
CSC’s Robert Flowerday and Kate Lagoe were in attendance and offer their perspective on conference takeaways.
#1 – The impact of continued growth in the direct lending market on agents
- We continue to see movement toward direct lending in the European market, with an estimated 80% of mid-market lending undertaken by alternative credit funds. Expectations at the conference were that this trend will continue to grow.
- The growth of the direct lending market in Europe in terms of volume is also matched by increasing ticket sizes. In this environment lenders are often under considerable pressure to close deals quickly and efficiently, thus the window for agents to onboard transactions is becoming ever tighter. It is more important than ever for agents to have an efficient KYC process and a pragmatic, flexible approach to document negotiation.
- This increase in private lending has had an impact on independent agents becoming first choice providers, particularly as documentation adapts to consider more proactive roles for agents.
#2 – Market signals point to a potential recession with some quirks
- The loan market has a likely maturity wall approaching at the end of 2023 and into 2024, with an estimated $50 billion of loans which will need to be refinanced.
- This will happen in what is broadly expected to be a recessionary environment. Consistent with the U.S. markets, Europe is facing rising inflation, with high energy prices, uncertainty as a result of the Ukraine-Russia conflict, and a growing cost of living crisis. Rates are expected to continue to rise and the market has already begun to react with tightening spreads.
- Interestingly, the traditional sectors we would typically expect to be hit first by a squeeze on consumer disposable incomes–aviation, other leisure travel, and eating out – are still performing well. This may be due to a change in consumer behaviours, as people rush to do things they’ve not been able to do during the pandemic.
- Anecdotally this was seen in practice with the chaos at UK airports across the spring half term holidays and Jubilee weekend. However, it is questionable whether this atypical behaviour will continue to hold in the face of consistently rising costs.
#3 – Loan documentation drafting is likely to have a material impact on outcomes of distressed situations
- Cov-lite provisions have now been standard within documentation for some time but had not been broadly tested until the pandemic. The approach was proven to be successful during COVID-19, with more flexible covenants ensuring that borrowers were able to avoid defaults and engage proactively with creditors to reach mutually agreeable solutions.
- However, it will be interesting to see how cov-lite provisions impact outcomes in the very different environment we are now heading towards. There is likely to be a different approach required in a broader recessionary context, where there is not the same package of government support or market goodwill to carry borrowers through.
- Another trend we are seeing within documentation is that transfer provisions are becoming increasingly restrictive, to the extent that secondary trading is becoming more difficult for certain credits.
- The impacts of this trend will be particularly clear in distressed scenarios where non-specialist lenders such as CLO managers may not be equipped to deal with the expected restructurings, and may not be able to trade out of a credit as a result of these restrictive transfer provisions.
- If distressed debt does not get into the hands of those special situations lenders who are most able to deal with it, a proactive and experienced agent becomes ever more important to assist in moving the process forward.
Experience Matters
CSC is one of the world’s largest privately held businesses, offering loan agency, corporate trust and SPV management services for loan and capital markets transactions. We support borrowers, lenders, sponsors and advisers across a wide variety of asset classes. To learn more, visit us at cscgfm.com or email us directly at Robert.flowerday@cscgfm.com or Kate.lagoe@cscgfm.com.