LMA Members' Survey: Outlook for the Syndicated Loan Market 202215 December 2021
In November 2021, 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, this survey was conducted in November 2021 prior to the emergence of the Omicron variant and recent new restrictions.
Please note, if the multiple choice options for a question are exactly the same as last year, a comparison of results between 2020 and 2021 is shown in the graph. To view the full results from the 2020 survey click here.
Which topic do you think will most influence the syndicated loan market over the next 12 months?
A material halving from 75% to 35.1% in those believing the global economy and the impact of Covid-19 will have the most influence on the syndicated loan market next year. This is a rather surprising response given that Covid-19 and its consequences are not yet behind us and the impact of higher government debt levels are still to be felt. This result is circa 25% below pre-Covid levels. It is however a testament to the market that, notwithstanding the challenges of Covid and the economy, it is showing itself to be highly competitive with an increase from 13.1% to 33.1% in those believing competitive pressures will now have the most impact. This probably arises from the considerable government funding initiatives which have boosted an already high level of liquidity in certain areas of the market.
Next year, where do you think the best opportunities will lie in the loan market?
The robust tone of the response to Q1. is mirrored in the fact that the number believing restructuring will provide the best opportunities has dropped from 36.4% to 13.6% and that corporate M&A will play an increasingly significant part in market activity, rising from 19.3% to 27.2%. Refinancing maintains its usual range of response at around 32%, slightly up on the 29% of 2020, but below the 34.3% of 2019.
What are your volume expectations for 2022 in the EMEA primary syndicated loan market?
Market confidence is reflected in the volume expectations for next year, with an increase from 40.2% to 51% in those expecting volumes to increase by at least 10%. This confidence is even more marked by the fact that 92.5% believe the market to be no worse than flat next year, of which 59.8% are expecting further growth of at least 10%.
What will be the volume of CLO issuance in Europe in 2022?
We are approaching EUR 37 billion new CLO issuance in 2021 at the time of writing, easily a post global financial crisis record, so almost 70% seeing a sub-EUR 30 billion market next year may seem conservative. There are still headwinds of course and seasonal uncertainty will no doubt impact sentiment. AAAs have been rangebound throughout the year and a weighted average cost of capital of 175-190bps clearly works well enough in the current pricing environment.
What has been the greatest influence on secondary market liquidity in 2021?
Respondents last year saw the impact of Covid having a much greater influence in 2020 than 2021 (55.9% versus 24.6%), though undoubtedly certain credits/sectors are still less favoured and this is reflected in price. The winner this time, the ongoing technical supply versus demand imbalance, is usually apt to overprice but this isn't necessarily the case in today's market
What affects settlement times the most in the current market?
KYC requirements invariably top the list when it comes to settlement delays but interesting to see (an albeit distant) second place for resource issues. We hear an increasing amount of noise generally about resourcing at the operational level and this is obviously a concern, especially given elevated trade volumes. Settlement times are beyond any reasonable KYC issue or indeed resourcing constraint so this will be even more in focus next year.
What are your expectations for the secondary market in 2022?
A fairly bullish outlook for secondary, tempered by technical factors rather than expected volatility or any risk-off approach. It's fair to say that trade liquidity is currently very strong and we see this borne out in settlement data (with a significant lag to trade date). Individual trade ticket volumes have trebled in the last 4 years.
How much have the financial regulatory changes over the past five years impacted your business?
Little material change year on year for the impact of regulation. 61% believing that it has materially/significantly impacted on their business, a minor increase from 60.6% the previous year. With a full regulatory agenda in Europe, covering such areas as banking reform and ESG, not forgetting the impact of global benchmark reform, it will be interesting to see what the response to this question is next year.
With the end of LIBOR as we know it approaching for many currency/tenor pairings and no new LIBOR loans after the end of 2021, what is your view on how transition in the syndicated loan market will progress from here?
Given that the end of 2021 is fast approaching and regulators have made it clear that there should be no new LIBOR loans after the end of the year, it is positive to see that 76.3% of respondents think that the market is either well set to meet the timelines or ready for new RFR loans, and the focus of the market will be on legacy transition going forward. Whilst 23.6% of members see that there will be transition in parts of the market but not the whole market, the percentage of members believing this has gone down compared to 38.2% last year. 48.6% of respondents believe that further time will be needed for legacy transition (for which tough legacy solutions may help). It is important to remember that tough legacy solutions, such as synthetic LIBOR, are temporary in nature and so a focus on active transition is needed beyond the end of this year.
What do you think is the principal barrier to improving developing market growth at the present time?
Whilst the impact of Covid-19 is no longer considered to be the primary barrier to growth in developing markets, at least when compared to 2020 (down quite substantially from 54.8% in 2020 to 14.1% in 2021), this may be because recent news of the latest Omicron variant (which originated in South Africa and whose severity is still to be determined at the time of writing) had not yet broken at the time of the survey's completion. Instead, the focus of respondents was on internal drivers such as compliance, sanctions and regulatory requirements (a third of respondents), political uncertainty/instability (a quarter of respondents) and the usual lack of "bankable" transactions (a fifth of respondents). Trade tensions between the US and China and FX volatility, meanwhile, were not really considered to be relevant at the present time (6.3% and 4.2% respectively).
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 four years, the results of the survey emphasise that there is no clear solution when it comes to supporting loan investment to developing markets. In first place, however (and up from third place in 2020) is the standardisation of loan market practices, regulation and documentation, which is perhaps unsurprising given the uncertainty and transition challenges which exist with regards to the discontinuance of US Dollar LIBOR, the benchmark against which many DM legacy loans are based. Aside from an increase in the importance of this area, other factors remain largely unchanged, highlighting that when it comes to emerging markets, all sources of financial or other assistance, whether those be obtained via international banks, DFIs, ECAs or credit risk mitigation products, have an important and necessary part to play in contributing to liquidity and ensuring transactions complete.
Which of the below do you think is currently the most significant obstacle to the integration of ESG issues in the syndicated loan market?
A significant number of respondents see either the availability and/or quality of existing ESG data (36.7%) or the limited availability of adequate ESG information from borrowers (26.5%) as the main obstacles to integrating ESG issues in the syndicated loan market. Recently, we have seen a number of moves by policymakers and industry bodies seeking to address these key issues, and it is hoped these initiatives will help to tackle some of these existing obstacles. Despite the huge focus on ESG at the moment, a lack of understanding of ESG issues within the market also remains a key concern, with 28.6% of respondents seeing this as the main barrier to mainstreaming ESG issues. The LMA intends to continue developing its educational programme around ESG and sustainable finance into 2022.
Where do you see the most potential for growth in the sustainable lending market over the next 12 months?
Over the past twelve months, we have seen rapid growth in sustainability linked loan (SLL) volumes, reflecting the broader market focus on sustainability and ESG issues. Looking ahead to 2022, 67.3% of respondents view SLLs as the product with the most potential for further growth within the sustainable lending market. The LMA hopes that the continued growth of the SLL market will help to drive borrowers towards setting and reaching ambitious sustainability performance targets.
Which of the following asset types do you think will attract the strongest demand in the European real estate market over the next 12 months?
45.7% of respondents see industrial and logistics as being likely to attract the strongest demand in the European real estate market over the next twelve months, perhaps as a result of the acceleration of the trend towards online retail resulting from the Covid-19 pandemic. Healthcare and life sciences is another area which many respondents (26.8%) see as being likely to attract strong demand over the next twelve months, and again this demand is likely to be driven, at least in part, by the Covid-19 pandemic. Only 7.3% of respondents view office as the sector likely to see the strongest demand, perhaps reflecting a change in demand due to increased levels of home- and hybrid- working by employees – although it remains to be seen whether this will be a longer-term trend.
What do you think will be the greatest disrupter for the European real estate market over the next 5 years?
38.7% of respondents believe that the greatest disrupter to the European real estate market over the next five years will result from macroeconomic factors. However, there has also been a significant increase in the number of respondents who believe climate change and broader ESG issues are likely to be the biggest disrupter to the European real estate market, with 29.2% of respondents now seeing these issues as having the greatest potential to disrupt the market (up from 15.8% in last year's survey). This reflects the significant shift in focus onto environmental and broader ESG issues which we have seen throughout the market.
What do you think is the biggest challenge to the adoption of technology for syndicated loans?
As evidenced in the LMA Fintech survey back in June, market participants clearly see technology as an opportunity for the syndicated loan market. What then becomes interesting is what is actually holding the market (or individual institutions) back. The responses to this question, whilst not directly comparable to previous surveys, broadly reflect the same challenges as last year's survey and the FinTech survey earlier in the year. From a more encouraging perspective and most noteworthy, the single biggest impediment to adoption (the need for scalable end-to-end solutions/interoperability) has declined in significance over time (from 48.8% to 46.1% to 29.5%), which may well reflect market initiatives to seek to address this important issue. That said, there appear to remain stubborn pragmatic challenges to the adoption of technology solutions, notably cost and on-boarding (security/privacy) issues. Both of these intrinsic challenges increased in importance and relevance in the latest survey – cost from 17% to 26%, on-boarding from 11% to 15.8%.
Which of the following emerging technologies does your business use (or is looking to use)? Please tick all that apply.
Despite challenges in adopting technology, it is clear many market participants are either using or looking to use technology solutions to support their businesses. Whilst the responses this year are not directly comparable to previous results, the most striking feature of the aggregate responses is the breadth of application of technologies across the syndicated loan platform from origination/distribution through transaction management/legal to back office/agency. There is a growing number of potential solutions looking to address each area or adjacent areas. What is also striking is to consider how many participants are not currently using technology in those areas where some of their peers may already be using it. Whilst we show in each category the % using or looking to use, there is arguably a significant balancing % shortfall in each category.