The Debt Connection – December 2014

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In the latest Debt Connection, Clearwater International’s Debt Advisory team sees banks are “open for business”.

Banks, to a large extent, have done much to repair their balance sheets over recent years. Whilst they will continue to dispose of certain non-core assets, banks have generally reached the point where they do not wish to shrink overall gross assets further. This means that there are some attractive financing options available to corporates looking to refinance or raise growth funding.

As UK banks have renewed their appetite to lend, we have seen terms for borrowers improve as banks compete with the debt funds that have filled the funding gap since the economic crisis. The improved terms include reduced pricing, looser covenant structures, increased leverage and lower amortisation profiles. There have also been incidences of banks approaching corporate businesses with credit approved loan facilities, as an indication of their appetite to support a particular company and to get committed funding ‘out the door’!

This drive for new business from UK banks also partially reflects the improving UK economy, but the performance of the Eurozone – as the UK’s largest trading partner – is expected to have some impact on businesses’ appetite to borrow and invest.

In comparison, a recent European Central Bank (ECB) study has shown that Eurozone banks have reduced their lending in response to recent stress tests and higher capital requirements whilst companies have held off investment, unsure of the future. ECB figures showed that in October, lending to the private sector contracted by 1.1% from the same month in 2013, after a contraction of 1.2% in the month of September. Recent political issues around Russia and Ukraine are causing uncertainty and are thought to be impacting borrower appetite.

The Bank of England’s Trends in Lending report for the six months to October 2014 showed net lending flow to UK businesses has been flat on average, indicating the end of balance sheet deleveraging by UK banks – something Clearwater International has witnessed in recent deals where banks are demonstrating an increased willingness to support businesses and to complete transactions in a timely fashion.

The increase in the supply of credit from non-bank lenders and banks has helped to support the M&A market. Recent research from Mergermarket and law firm CMS states that in comparison to the first half of 2013, European deal values in H1 2014 rose 34% to €340.8bn while the volume of deals rose by 4% year-on-year to 2,860. They also report that Europe’s executives are more bullish about the M&A outlook than they were a year ago, with two-thirds of respondents expecting M&A activity to increase and 11% anticipating a significant increase.

The end to balance sheet deleveraging by banks is driving behaviours in the marketplace, with increased liquidity trying to find a home with somewhat cautious borrowers who remain mindful of the economic and current political environment. With new debt funds continuing to be raised and the inevitable end to the investment period of some in the future, we anticipate a push from the non-bank funders to invest this dry powder. This push from funders to lend money will likely mean terms continue to improve for borrowers in the short to medium term.