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LMA releases results of its members' survey: outlook for the syndicated loan market in 2020

In November 2019, the LMA surveyed its membership on the outlook for the syndicated loan market over the next 12 months. The survey comprised 17 multiple choice questions covering the primary and secondary markets, real estate finance, the developing markets and green finance specifically, and lastly regulation.

The results below were collected anonymously and represent the personal views of the Association’s members actively working in the loan market today. The commentary provided by the LMA compares, where relevant, the results from this year’s survey with those of the previous year. If the multiple choice options for questions are exactly the same as last year, a comparison of results between 2018 and 2019 is also shown. To view the full results from the 2018 survey click here.

Question 1:
Which topic do you think will most influence the syndicated loan market over the next 12 months?

With so many of last year's concerns still unresolved, it is not surprising that the responses this year are very much in line with last year. Brexit, US/China trade 'wars', a slowing global economy remain, to which can now be added an election in the UK, possible but unlikely impeachment of the US President and unrest in Hong Kong.

Question 2:
Next year, where do you think the best opportunities will lie in the loan market?

Again fairly similar to last year. The only minor changes as to where opportunities are most likely are refinancings up from 30.2% to 34.3% and leveraged and emerging markets down by a couple of percent.

Question 3:
What are your volume expectations for next year in the EMEA primary syndicated loan market?

Given the uncertainty and the expectation that refinancings present the best opportunities, it is not surprising that a slightly more pessimistic tone comes through in these responses. Last year, 36.5% thought the market would increase by 10% and only 16.9% thought it would decrease by 10%. Those expectations have now been reversed by around 10% for each expectation.

Question 4:
What will be the volume of CLO issuance in Europe in 2020?

The majority of respondents expect significantly lower CLO issuance in 2020, with only 3.2% seeing any material uplift in volumes year-on-year. 2019 issuance is closing in on €30BN, another post crisis record in terms of both volume and individual issues. Spreads have widened in Q4 however, both at the lower and top end of the ratings stack, raising overall cost of funds and eating into equity returns. Given this dynamic, coupled with loan spreads trending tighter overall in primary (despite some weakness in lower rated names in secondary), it doesn't paint the most attractive picture for growth in issuance and the survey results are perhaps reflective of that.

Question 5:
What has been the greatest influence on secondary market liquidity this year?

No surprise that technicals continue to have a dominant impact on secondary, with prices seeing little gravitational pull unless event driven. Increased demand from both CLOs and managed accounts has not been matched by primary supply, a familiar feature in recent years. Increasingly tighter transfer restrictions are on investors' radar and these will inevitably have a negative impact on liquidity.

Question 6:
What affects settlement times the most in the current market?

The impact of KYC requirements on secondary (and indeed primary) settlement times remained a major issue this year, and we sincerely hope our work in revising the JMLSG Guidance (now approved by HM Treasury) will go some way to mitigate this, certainly as it relates to the agent.

Question 7:
What are your expectations for the secondary market next year?

Respondents on the whole see a continued mix of technical influences and market volatility, the latter perhaps just dominant as a mix of macro issues continue to create significant headwinds. Already there is a degree of bifurcation and defensive names are likely to catch an even bigger bid into 2020.

Question 8:
How much have the financial regulatory changes over the past five years impacted your business?

Regulation is continuing to bite with a total of 62.5% believing it is impacting their business either significantly or materially. In relation to 32.3% believing financial regulation is only impacting their business moderately, we consider this might be a lower number if we limited this question to our bank/non-bank members.

Question 9:
Are you concerned about the impact of Brexit on the loan product?

No real change year-on-year. A further year of preparation if not resolution has allowed a small reduction in the 'very concerned' and similar increase in the 'not really concerned'.

Question 10:
How concerned are you with LIBOR discontinuation and the readiness of the syndicated loan market by the end of 2021?

As we edge closer to the end of 2021, it is unsurprising to see that the number of respondents who are either very concerned or concerned about the discontinuation of LIBOR and the readiness of the syndicated loan market has increased since the survey last year (from 62.5% to 66.9%). Whilst we have seen a handful of bilateral loan deals and continuing work on appropriate compounding methodologies and systems readiness, as well as the publication of LMA exposure draft documentation, there is still much work to do in a short amount of time. Once compounding methodologies and conventions are agreed, systems can be made available. However, it will take time for market participants to implement those systems and so we could very well see some market players ready before others.

Although the percentage of respondents not really concerned with LIBOR discontinuation has gone down since last year (from 37.5%), it is interesting to see the split in the reasons why. Some 3.5% believe that forward-looking term rates will be available. Whilst certain currency jurisdictions are working on forward-looking term rates, it is not certain that these will either be available at all or in sufficient time. Some 30% are not concerned as they think the market will develop a solution whatever that may be. Whilst it is true that the market needs to develop a solution, it is important that market participants do not just sit back and wait for others to develop a solution. It is important that market participants engage with the regulators and the relevant working groups to help find a solution. It is clear, for example, from discussions on compounding methodologies that different stakeholders have different views and so it is important that market participants engage in the debates to limit the risk of divergence and confusion in the loan market.

Question 11:
How competitive do you believe the syndicated loan market to be?

The only comment on this response is to ask which part of the market the 3% who believe the loan market is not very competitive belong to!

Question 12:
What do you think is the principal barrier to improving developing market growth at the present time?

There is little doubt that economic factors such as the continuation of trade tensions between the US and China are likely to have a negative impact on developing markets. It is therefore unsurprising that over a third of respondents this year (35.7%) selected 'economic uncertainty, including impact of trade wars' as being the biggest barrier to developing market growth. This contrasts to 2018, when its relevance was considered almost equal to both compliance/sanctions risk and political risk. Interestingly, despite currency and exchange rate volatility being prevalent in developing markets in recent times (e.g. in Turkey), very few respondents considered this to be a key barrier to growth. This may be indicative of a move away from USD lending, the growth of domestic local currency markets and an increased range of currency risk mitigation products.

Question 13:
What do you think is the most important factor supporting developing market lending at the present time? Please rank, with 1 being most important.

As has been the case for the last two years, the results of the survey demonstrate that there is no clear solution when it comes to ways of increasing loan volumes to developing markets. However, the work of the LMA remains a vital part of the process, with 'standardisation of loan market practices, regulation, documentation etc.' ranking second as the most important contributing factor. In first place, however, is 'international investment via commercial banks, funds or otherwise', highlighting that whilst other market players such as domestic lenders, ECAs, DFIs and insurance providers play an important role in the credit risk mitigation process, the success of their contribution is ultimately predicated on there being available liquidity from international sources. This is likely to be important in the coming months, since if there is a retrenchment of international investment as a result of trade wars, sanctions, or otherwise, developing market loan volumes may continue to be impacted.

Question 14:
Who do you think will drive the growth of green and sustainable lending in 2020?

Whilst further impetus will be provided if regulatory changes are enacted with the aim of supporting sustainable finance, it is not surprising that the parties themselves are believed to be the primary drivers for growth of green and sustainable lending in 2020. With increasing public support for environmental concerns, and reputational risk at the forefront of business strategy, it is clear why borrowers are viewed as the key drivers for growth in this area.

Question 15:
What is the most important issue that needs addressing to maintain momentum in the push towards sustainable finance?

Mobilising investors to finance sustainable projects on a global scale is indispensable for achieving tangible results in the fight against climate change and environmental degradation. It is therefore not surprising that members view a clear globally applicable approach for principles as an important issue that needs addressing. Regulatory relief and improved accuracy of data will also be welcomed measures in this arena.

Question 16:
To what extent do you think that ESG considerations will impact upon the European real estate finance market in 2020?

The vast majority of respondents foresee ESG considerations as having some impact on the European real estate finance market in 2020. Green and sustainability linked loans are already being used to drive investment into green and sustainable buildings, and these products may be used more frequently in the real estate finance market in the future as increasing focus is placed on ESG considerations.

Question 17:
What do you think will be the greatest disrupter for the European real estate market over the next five years?

Macroeconomic factors and geopolitical tensions look set to dominate the landscape for European real estate over the next five years. This will come as no surprise to parties investing in real estate assets across Europe, particularly in light of the continued uncertainty around the UK's withdrawal from the EU, weak growth figures globally and the ongoing trade war between the US and China.