LMA Members' Survey: Outlook for the Syndicated Loan Market 2024
06 December 2023
In November 2023, the LMA surveyed its membership on the outlook for the loan market over the next 12 months. The survey comprised 16 multiple-choice questions covering the primary and secondary markets; real estate finance, the developing markets, sustainable 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 for 2023 and 2022 is shown in the same graph.
You can also see the results from our 2022 end of year survey here: 2022 Survey Results
Question 1:
Which topic do you think will most influence the syndicated loan market over the next 12 months?
Nobody can say that the loan market is not consistent, with 67.2% (67%-2022), believing the global economy and other risks, including geopolitical, will have most influence on the syndicated loan market next year. This probably also unfortunately reflects how little progress has been made over the past year on the major geopolitical tensions, in fact, they have probably got worse with events in Gaza/Israel. Albeit from an economic perspective in most countries, inflation is now reducing, and rates would appear to have peaked.
Question 2:
Next year, where do you think the best opportunities will lie in the loan market?
The good news, unless you are a restructuring lawyer, is that the expectation of restructurings offering the best opportunities is down from 38.6% last year to 29.5% this year. However, it may be too early to make that call as the full impact of higher rates and lower asset values have yet to fully impact. Further concerning is that Corporate M&A and leveraged finance remain subdued with less profitable refinancings looking to be where the best opportunities will lie, at 44.2% next year.
Question 3:
What are your volume expectations for 2024 in the EMEA primary syndicated loan market?
Volume expectations are more optimistic year on year, with 72.4% expecting volumes to be at worst unchanged or to increase by more than 10%. This compares to last year at 53.5%. Those expecting a decrease by more than 10% is down to 16% from 36.8%. These numbers probably reflect the visibility on expected refinancings rather than any increase in event driven deals, if the previous answer is any indication.
Question 4:
What will the volume of CLO issuance in Europe be in 2024?
Despite 2023 CLO issuance set to exceed the EUR26.2BN seen last year, respondents are conservative in their estimates for 2024 with some 75% predicting volumes less than EUR20BN. In hindsight the outlook for this year was less optimistic at the end of 1H with many CLO desks revising down full year estimates, some indeed to a sub EUR20BN context. Credit for a resurgent close to the year has been given in part to better clarity for technicals going forward, suggesting again that survey expectations for 2024 issuance may be overly cautious perhaps.
Question 5:
What has been the greatest influence on secondary market liquidity in 2023?
Geopolitical headwinds are seen as having had the biggest impact on secondary liquidity in 2023, echoing sentiment for 2022. Primary flow now ranks a closer second this time however, as experience this year of patchy primary deal flow, and the resultant strong secondary bid, has no doubt coloured responses. Indeed the ELLI only gave up a winning streak in late September, having risen steadily to 96.7 from 88.1 in October 2022. Given anticipated increased primary flow in 2024, we could see some gravitational pull on secondary pricing going forward.
Question 6:
What affects settlement times the most in the current market?
From the causes of settlement delays included in the survey, top 2 issues remain KYC and resourcing, accordingly to respondents, with voting largely unchanged from last year. Whilst KYC is almost a constant, resourcing may begin to figure more highly should ticket volumes continue their upward trajectory. LMA settlement data saw record ticket numbers in the latest print......
Question 7:
What are your expectations for the secondary market in 2024?
Whilst volatility on the back of external events is still expected to have the biggest impact on secondary into 2024, results are on the whole more mixed than last year. Indeed, increased primary flow hardly figured last time around (appropriately) but almost a quarter of respondents see this as the main driver next year. Equally another quarter of those participating see the market contracting, with limited liquidity and risk appetite. What is clear is that few expect secondary to be as well bid in 2024 and the combination of volatility and primary flow (together 60% of the vote) would bear this out.
Question 8:
How much have the financial regulatory changes over the past five years impacted your business?
Little change year on year with 53.9% saying that regulatory changes have impacted their business either significantly or materially, against 54.9% last year. Those less impacted, either moderately or minimally now stand at 46%, largely unchanged from 45.1% last year. This reflects the fact that the market has come to terms with regulation for either for good or bad and not seen any material changes year on year.
Question 9:
What do you think is the principal barrier to improving developing market lending at the present time?
Respondents are of the view that, as was the case in 2022, developing markets, like their European counterparts, will remain heavily impacted by rising interest rates, as well as other uncertain economic conditions. The second principal barrier to improving the lending environment is political instability – perhaps unsurprising given 2024 is set to be the biggest election year in history.
Question 10:
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 six years, the survey results prove that there is no "one size fits all" solution when it comes to supporting loan investment to developing markets. As was the case last year (and up from third place in 2021) DFI/ECAs are in first place. This is to be expected, however, given that such institutions are symbolic of the need for risk mitigation in loan structures, and that is exactly what uncertain economic and political conditions tend to require.
Question 11:
Which of the below do you think is currently the most significant obstacle to the integration of ESG issues in the syndicated loan market?
Access to good quality ESG data and borrower ESG information are the foundations upon which ESG issues are assessed. It is therefore not surprising that their availability remains a top concern when it comes to integrating ESG issues in the syndicated loan market. It is somewhat surprising to see lack of understanding of ESG issues remain as the third largest obstacle to ESG integration due to the pervasiveness of the topic in the market, at all levels.
Question 12:
Where do you see the most potential for growth in the sustainable lending market over the next 12 months?
Sustainability linked loans (SLLs), being a transitional tool and inherently flexible in nature, continue to be the star performer of ESG activity. However, it is interesting to see that Green Loans are expected to take a larger piece of the sustainable lending pie moving into 2024, which reflects recent market data.
Question 13:
How do you see demand for office space changing over the next 12 months?
The majority of respondents expect demand for offices to either fall or stay flat in the year ahead. Whilst the long-term outlook for offices remains uncertain, there are some green shoots - with fewer respondents expecting to see demand for offices falling over the next 12 months compared to this time last year.
The uncertainty around offices as an asset class will not surprise market participants as much attention has been focussed on vacancy rates - particularly in the US – leading to negative sentiment in relation to this asset class. The pandemic and changes in working from home policies have also continued to impact demand for offices in Europe. It should be noted, however, that the picture in relation to offices is far from homogenous, and green office buildings in prime locations are still proving to be attractive.
Question 14:
What do you think will be the greatest challenge for the European commercial real estate market over the next 5 years?
There has been very little movement over the last 12 months in terms of the perceived challenges for the commercial real estate market over the next 5 years. Monetary policy and the macroeconomic environment was once again named as the biggest perceived challenge, with 46.8% of respondents selecting this answer. With inflation having proved sticky for much of 2023, the market is now adjusting to a ‘higher for longer’ interest rate environment. Changing demographics remain high on the list of perceived challenges as do climate change and broader ESG issues.
Question 15:
What do you think is the biggest challenge to the adoption of technology for syndicated loans?
With technology playing a significant role across the loan market, it is useful to consider barriers to its adoption. Perhaps unsurprisingly, responses this year were broadly consistent with last year focusing on the need to change mindsets/prove out use cases, the importance of interoperability (increasing in importance as a challenge) and the cost to implement. These three primary barriers had similar scores to last year albeit with a reduction in the reluctance to invest (down to 21% from 23.8%), which is a positive sign. The most statistically significant move was a jump in the relative importance of on-boarding as a challenge (up to 19.8% from 15.9%), no doubt reflecting an increased focus on cyber risk, cloud adoption and enhanced diligence. There was also a positive reduction in the relative importance of persuading borrowers (down to 5.6% from 8.3%), which might suggest clients are more accepting of and receptive to new technologies.
Question 16:
Which of the following technologies does your business use (or is looking to use)?
As with last year, it is positive to see technology progressively supporting the syndicated lending business across the life cycle of a loan with continued emphasis on improving efficiencies in each area (origination/distribution, execution/transaction management, back office/agency). Whilst overall levels of adoption remain broadly similar to last year, the most notable increase can be seen in ‘Document Automation’ (increasing from 42.8% to 50.5%) which may reflect a number of initiatives in this area, including LMA.Automate. The LMA is keen to foster efficiency and reduce pain points which requires innovative solutions. Interoperability remains a challenge (also highlighted in the previous question) with a consistently low level of adoption (12.5% down from 13.1%) as solutions seeking to cover the full life cycle struggle without standardisation and integration. With adoption levels appearing to flatline relative to last year, it would seem some market participants may still be behind their peers given the balancing % not yet using these technologies.