LMA Members' Survey: Outlook for the Syndicated Loan Market 202301 December 2022
In November 2022, the LMA surveyed its membership on the outlook for the syndicated loan market over the next 12 months. The survey comprised 18 multiple choice questions covering the primary and secondary markets; real estate finance, the developing markets, ESG 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 is shown in the same graph.
Which topic do you think will most influence the syndicated loan market over the next 12 months?
One would have to have been living under a rock for most of this year not to have expected this result. Even last year we noted that the material halving from 75% in 2020 to 35.1% in 2021 was premature, so with the return to war in Europe for the first time for seven decades, with all the resulting knock-on effects, it is in no way surprising that 67% now believe that the wider economic and political factors will have the most influence on the market next year.
Next year, where do you think the best opportunities will lie in the loan market?
The increased risk environment expected in question 1 is reflected in the increase from 13.6% in 2021 to 38.6% in those expecting restructurings to represent the best opportunities. We've had results like this before, most notably in 2020 in the wake of Covid-19, when 36.4% believed restructurings would offer the best opportunities and they subsequently didn't, but this time, with inflation and rates rising and many economies under extreme budgetary pressure, the pessimistic tone is more likely to come true.
What are your volume expectations for 2023 in the EMEA primary syndicated loan market?
The more pessimistic tone in the answers to question 1 and question 2 is reflected in the expectation by 36.8% of responders that volumes are expected to decrease by more than 10% next year. By way of comparison, last year the expectation was that 51% expected a more than 10% increase. Of course, it is worth remembering that not all the areas of the diverse EMEA membership of the LMA are as negatively impacted as others and this probably accounts for the fact that 53.5% of responders see no change, or even an increase by more than 10% in volumes next year.
What will the volume of CLO issuance in Europe be in 2023?
With overall new issue volume this year down a third on 2021, it's no surprise respondents are conservative about CLO volumes for 2023, with ca. 73% seeing less than EUR20 billion. The backdrop is markedly more challenging than this time last year with AAA tranches well into the 200s and less appetite reported from traditional investors. That said, a pick-up in activity into Q4 bodes well perhaps for a more encouraging start to the new year.
What has been the greatest influence on secondary market liquidity in 2022?
Secondary markets have not escaped the impact of geopolitical issues, with the ELLI sinking to ca. 89c in June having started the year a whisker under 99c. Whereas in 2021 we saw respondents point to a supply/demand imbalance as the main driving factor, the landscape changed from Q1 this year and 60% duly note that these issues have dominated.
What most affects settlement times in the current market?
KYC requirements still top the list of issues affecting settlement times, with resourcing again figuring highly. We continue to work with market participants to understand where delays occur from both a borrower and counterparty KYC perspective. We are also looking at a junior resource educational programme to increase knowledge and efficiency on the ground. We also encourage active participation in our various operational working groups to share ideas.
What are your expectations for the secondary market in 2023?
Whereas the majority of respondents last year saw markets in 2022 being well bid, driven in part by increased new primary volume, the reality was quite the opposite and this shows through in cautious views for secondary next year. A majority sees flows dictated by geopolitical events and the economic backdrop, with 28% expecting risk appetite and liquidity to be limited. That said, and as we've seen in 2022, secondary usually provides windows of opportunity for the agile investor and we may well see more of the same next year.
How much have the financial regulatory changes over the past five years impacted your business?
With so many other concerns on the agenda, it is probably not surprising that all the regulatory changes are lessening their impact. The shift from 29.5% to 42.1% saying that they are having only a moderate impact is evidence of this. However, regulation still has a significant/material impact for 54.9% of respondents and is still very much part of the lending environment.
With the end-June 2023 deadline for transition of legacy US$ LIBOR facilities approaching: what do you consider to be the biggest challenge for outstanding legacy/remediation work?
The responses show a balanced picture of the challenges for the transition of legacy US$ LIBOR facilities. Whilst there are various factors at play, it is very positive to see that 21.3% of respondents state that there are no real issues/transition is in hand. The variety of responses could be reflective of the mixed experience of respondents, with some having already gone through the end-2021 LIBOR transition process and being well prepared plus the relative importance of exposures to US$ LIBOR. Given the current economic environment, it is unsurprising to see that borrower hesitancy/market conditions is seen as the biggest challenge for outstanding legacy/remediation work (22.9%). Whilst the current economic environment has not been conducive to refinancing opportunities, as markets settle and parties are discussing their loans (for example, through extension options), it is important to discuss transition as part of this process.
With the end-June 2023 deadline for transition of legacy US$ LIBOR facilities approaching: when do you think the majority of your US$ LIBOR loans will be transitioned to SOFR?
It is positive to see that 86.8% of respondents think that the majority of their US$ LIBOR facilities will transition by the end-June 2023 deadline. An additional eighteen months beyond end-2021 seems to have helped the market, along with clear milestones being set by regulators globally. It is promising to see that only 13.2% suggest that transition of their loans may happen beyond the deadline. On the flipside, only 38.3% of respondents would have transitioned away the majority of their loans by end-March 2023. This has similarities with the results of the ARRC loan remediation survey and could point to potential operational and resource challenges in Q2 2023 from trying to convert a large number of contracts in a short space of time. Whilst the recent proposals from the FCA for synthetic US$ LIBOR could help bridge the transition of the tail of loans transitioning beyond the deadline, it is important that active transition remains the focus of market participants.
What do you think is the principal barrier to improving developing market lending at the present time?
Developing markets are always impacted by global economic conditions, driven partly by the fact that a large proportion of investment is international in nature. Therefore, the fact that nearly half of respondents considered rising interest rates and economic uncertainty to be the principle drivers impacting the growth of lending to emerging markets is not surprising. Nor that political instability, which is of particular focus to investors at the present time, was in second place.
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 five years, these results indicate that there remains no "one size fits all" solution when it comes to supporting loan investment to developing markets. In first place, however (and up from third place in 2021) is DFI/ECA involvement. This is understandable given the current economic backdrop. It is always at times of market volatility that the support of institutions such as DFIs and ECAs becomes instrumental.
Which of the below do you think is currently the most significant obstacle to the integration of ESG issues in the syndicated loan market?
Availability of data has been a hotly debated topic for the past few years, and as regulatory requirements regarding ESG data disclosure continue to level up, it is no surprise that availability and/or quality of existing ESG data in the market is seen as the most significant obstacle to ESG integration moving forward.
Where do you see the most potential for growth in the sustainable lending market over the next 12 months?
Sustainability linked loans (SLLs) continue to be the star performer of ESG activity, and this is no surprise given the flexibility of the product. SLLs cannot only be applied across sectors, borrower types, etc. but are a perfect tool to aid the transition to a more sustainable future.
How do you see demand for office space changing over the next 12 months?
Over half of respondents expect to see demand for office space fall over the next 12 months. Of these, most respondents expect that demand will fall by less than 10%, however over a quarter of respondents predict that demand will fall by more than 10%. The results suggest that Covid-19 and the move toward more flexible working patterns has not led to the end of the office, but they do suggest that conditions look more challenging for this sub-sector in the year ahead.
What do you think will be the greatest challenge for the European commercial real estate market over the next 5 years?
48.6% of respondents believe that the greatest challenge for the European commercial real estate market over the next five years will be from monetary policy and the macroeconomic environment. Over the course of this year, we have already started to see the impact of high inflation and the move away from a low interest rate environment, and macroeconomic factors look set to continue to present challenging conditions for the real estate finance market over the next few years.
What do you think is the biggest challenge to the adoption of technology for syndicated loans?
The responses to this survey question are directly comparable to those from last year and provide a useful overview of the range of barriers to the adoption of technology for syndicated loans. At first glance, there is little change from last year but the fact that the 'Need for scalable end-to-end solutions/interoperability' has again reduced in importance and is now no longer the single biggest barrier (having been as high as 46% three years ago) is significant, suggesting continued market initiatives to address this important issue are having a positive effect. The most statistically significant move is the increased relative relevance of 'Changing cultural mindsets/compelling use case' (up from 20.4% to 27.6%), perhaps not surprising but a reminder to both providers and potential users that there is work to do to overcome inertia/status quo and build the necessary positive internal business case.
Which of the following technologies does your business use (or is looking to use)? (Please tick all that apply)
It is positive here to see technology progressively supporting the syndicated lending business for many market participants with solutions available across the business. Whilst the overall level of adoption remains broadly similar to last year, significant increases can be seen in 'Electronic platforms for execution and/or transaction management' (increasing from 24.6% to 51.5%) and 'Electronic platforms for back-office/agency functions (including KYC)' (increasing from 33.8% to 52.8%). Improving efficiencies in these areas through technology solutions is an encouraging sign. Interoperability remains a big challenge (also highlighted in the previous question) with a consistently low level of adoption (13.1%). Whilst adoption levels are increasing, some market participants still appear to be behind their peers — the balancing % not yet using these technologies.