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LMA releases results of its members' survey: outlook for the syndicated loan market in 2021

In November 2020, 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, green finance and FinTech 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 is provided by the LMA and includes comparison, where possible, of the results from this year’s survey with those of the previous year.

Please note, if the multiple choice options for a question are exactly the same as last year, a comparison of results between 2019 and 2020 is shown in the graph. To view the full results from the 2019 survey click here.

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

No surprise that concern over the global economy has increased materially from 59.2% last year to 75.0% this year, given the severe impact of Covid-19. Further continuing uncertainty over Brexit, China/US trade ‘wars’ and tension in many parts of the world have not reduced over the year, in fact they have increased.

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

The concern around the economy and particularly the severe impact of Covid-19 on certain sectors of the economy, is reflected in the increase from 21.9% to 36.4% of respondents believing that the best opportunities will arise in restructuring. However, refinancing and corporate M&A have held up reasonably well, reflecting the refinancing pipeline and that any crisis usually throws up opportunities for ‘value’ acquisitions and consolidation.

Question 3:
What are your volume expectations for 2021 in the EMEA primary syndicated loan market?

The loan market is nothing but positive in its attitude, so despite all the concerns it is encouraging to see that 47.1% expect the market to increase next year by at least 10%. This is a significant increase from expectations last year which were for a 26.2% increase in volumes of that amount.

Question 4:
What will be the volume of CLO issuance in Europe in 2021?

Some 70% of respondents see total new CLO issue volume in Europe below €20BN in 2021, even as a rollercoaster 2020 looks set to surpass that figure and demand for AAA paper builds afresh into the year end. Resilience, particularly in view of ratings actions, has certainly been tested this year and managers have largely kept these key investors onside. That headwinds remain is an obvious understatement, no doubt borne out in survey sentiment.

Question 5:
What has been the greatest influence on secondary market liquidity in 2020?

The March lockdown kicked off a period of volatility not seen since the global financial crisis, with the initial correction and snap-back followed by increased trading levels across the board. Covid was the biggest influence according to the majority of respondents, the continued technical imbalance taking prices perhaps more sharply back up than we have seen in other crises. Ongoing portfolio management as the pandemic plays out has kept trade liquidity high, as evidenced by LMA data.

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

One constant in a volatile secondary is the propensity for KYC issues to delay trade settlement. Trade counterparty KYC has been cited as one of the reasons behind a spike in Q3 settlement times, perhaps straddling both top survey choices here, although admittedly in sub-allocation the seller may not know the end buyer. Work on mitigating KYC issues remains a top priority.

Question 7:
What are your expectations for the secondary market in 2021?

Some 47% of respondents see fallout from the pandemic and broader geopolitical risks shaping the landscape for secondary in 2021, with volatility expected to remain high. As we have seen since the March correction, this could provide buying opportunities for asset hungry investors (supply/demand imbalance to continue), particularly for those with appetite further down the credit curve.

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

With much of the regulatory ’tool kit’ now well established, it is not surprising that as market participants adapt, the number who believe regulation materially impacts their business has fallen from 19.4% to 12.9%. However, 60.6% of respondents believe regulation to have at the very least a significant impact on their business.

Question 9:
With progress made during 2020, what is your view on the readiness of the syndicated loan market for LIBOR discontinuation by the end of 2021?

Given the progress made in 2020 on conventions for the loan market, documentation and increasing deal activity, it is positive to see that the number of respondents who think that the market will not be ready to transition at the end of 2021 has decreased from last year (from 19.7% to 11%). As we head into 2021, there is still a lot of work to do in a short space of time. This includes being ready for interim milestones relating to ceasing LIBOR lending (approaching in the first three to six months of the year), the transition of the legacy book and the implementation of loan systems. So it is unsurprising that 38.2% of respondents see the prospect of some market players being ready before others (although it is positive that this is down from 47.2% last year).

It is interesting to see the increase in respondents (from 3.5% to 20.2%) who believe that forward-looking term rates or legislative solutions will be available in time. Whilst this in some ways is not surprising given recent regulatory announcements, it is important to remember that such legislative solutions may only be available for certain contracts (i.e. those classed as 'tough legacy') and there may be conflicts between different legislative solutions leading to uncertainty. There have been positive developments in respect of forward-looking term rates, however, the use cases for these may be limited (for example, in sterling) and the availability of such rates is still not certain in some markets, remaining dependent on sufficient liquidity developing in the derivatives market in time. It is therefore important that the focus remains on active transition and available solutions where possible.

Question 10:
What do you think is the principal barrier to improving developing market growth at the present time?

With the focus of the world on the (still unascertainable) impact of Covid-19, it is unsurprising that over half of respondents selected economic uncertainty as being the principal barrier to growth in developing markets. That said, the fact that other factors such as political uncertainty, sanctions and lack of bankable transactions are still cited as being relevant (albeit to a much lesser extent) illustrates that in these regions, even a bounce back in the world economy in 2021 will not necessarily translate into an immediate positive impact on developing market economies.

Question 11:
What do you think is the most important factor supporting developing market lending at the present time?

As has been the case for the last three years, the results of the survey emphasise that there is no clear solution when it comes to boosting loan investment to developing markets. 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 lending 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 Covid-19 or otherwise, developing market loan volumes may continue to be impacted.

Question 12:
Who do you think will drive the growth of green and sustainable lending in 2021?

Lenders, investors and borrowers all ranked similarly last year so it is significant that over 40% of respondents now consider investors to be the most likely to drive growth in green and sustainable lending in 2021. This seems to support the view that ESG issues have moved rapidly up the agenda for investors over the last year or so. It is also interesting to note that market participants, rather than regulators, are still perceived to be the key drivers for green and sustainable lending moving into 2021.

Question 13:
As we look ahead to 2021, where do we think the primary focus for ESG improvement will lie?

ESG is more than the sum of its parts, and it is not surprising that the market views ESG as a holistic measure, to which the market should subscribe. What is perhaps surprising is only 9.9% of respondents believing Social to be the primary focus for 2021, particularly given the number of Social, pandemic-related, loans issued during the course of 2020.

Question 14:
What is the biggest obstacle to financing retrofit works aimed at improving the environmental performance of buildings in the European real estate finance market?

Insufficient training and education, as well as a lack of borrower engagement were noted as the key barriers to financing the retrofit of existing buildings in the European real estate finance market. This suggests that further industry efforts are still needed to scale up the financing of retrofit projects in the real estate finance sector in order to improve the energy efficiency of existing buildings.

Question 15:
What do you think will be the greatest disrupter for the European real estate market over the next 5 years?

This year, the Covid-19 pandemic has brought clear new challenges for the real estate finance sector, with 31% of respondents believing that it will be the greatest disrupter for the European real estate market over the next five years. As restrictions are hopefully eased over the course of 2021, the real estate finance market will need to respond to some of the challenges and opportunities that the global pandemic has brought about including the acceleration of trends towards working from home and online retail.

Question 16:
What do you think is the biggest challenge to ‎the adoption of technology for syndicated loans?

Technology is clearly increasing in importance and relevance to the loan market, helping shape the market now and into the future. This was a new question added this year to assess impediments to technology adoption. In line with the LMA FinTech survey back in May, it remains very clear that efforts to assist scalable solutions able to operate together across loan markets is THE key momentum shift required. Industry bodies can be helpful here. Other impediments have marginally declined in importance other than cost which unsurprisingly is more of a challenge now than back in May (17.4% v 8.43%).

Question 17:
Which of the following emerging technologies does your business use (or is looking to use)? (Please tick all that apply)

This was also a new technology-related question to assess market appetite and interest in new technologies. The main conclusion, similar to the May FinTech survey, is that a strong majority of participants identified document automation and electronic platforms for collaboration and negotiation as relevant and useful. There was also good interest in AI, big data and blockchain. We will continue to monitor emerging technologies and their applicability to the loan market.