Capital Structure Forum: Hoping for a go-slow

In November came the US election shock – but it was its forerunner, the Brexit vote, which was the hot topic at PDI’s Capital Structure Forum in London in late October, where a mixture of opportunity and caution was the prevailing mood.

While many in the industry wish to avoid a severe downturn, the consensus among delegates was that banks would restrict their lending in a period of economic uncertainty. Michael Arougheti, president of Ares Management, said that 2017 is likely to be more volatile, but that this could be good for the asset class.

“The best environment is one of slow growth. The structure of the loans themselves allows you to reprice your risk in volatile markets. Making a mid-market loan can take between two and six months and you’re constantly re-underwriting the risk, which means you’re able to make changes as you go. And because we’re investing capital over a three-year period, the timeframe allows us to be measured in any market environment,” he said.

The role of the banks will be key to the development of the industry over the next 12 months. Where previously the leading financial institutions looked at funds with suspicion, many now see them as having an important role in maintaining relationships with key clients.

Arougheti said banks are outsourcing a lot of their risk management and loan origination to funds as they contend with restrictions on lending. “There is more co-operation with banks, they see us as partners,” added Karthi Mowdhgalya, founding member of BlueBay Asset Management.

Banks are keen on maintaining their footprint in the asset class, which has a track record of low default rates.

“Some banks have been less busy and others have been a bit more on the front foot. Relationships with banks are an informal partnership and there is now long-term recognition that funds are providing a good service,” said Andrew McCullagh, head of origination at Hayfin.

'Terribly fashionable'

Panellists recognised increasing competition among funds in the market, with McCullagh stating it is a “terribly fashionable industry” as the asset class becomes more mainstream.

This makes the experience of the team a key factor in a firm winning deals. “It is a very labour-intensive market and if we see competition it tends to be around the structure of the deal and not the pricing,” said Paul Hatfield, global chief investment officer at Alcentra.

Nevertheless, there was acceptance that challenges lie ahead. Many of the panellists noted that sterling’s fall may have an impact on their portfolios, albeit a limited one.

“There is no doubt we are going to see stresses and it will lead to under-performance in some businesses,” said McCullagh.

Mowdhgalya agreed there would be difficulties, but he explained that the firm’s portfolio was dominated by businesses which were “national leaders in their national markets”.

While the future may be a mixture of fear and hope, the industry has to contend with the more practical issues in front of it.

Asked what the industry should demand if it had a seat at the Brexit negotiation table, Mowdhgalya was clear that passporting rights is a priority and that the UK government should continue to signal its support for the non-bank lending environment. McCullagh stressed the importance of ensuring London remains a welcoming place for talent from Europe and across the world.

Refusing to be put off by the prevailing uncertainty following the vote, James Keenan, global head of fundamental credit at BlackRock, echoed a feeling shared by many on the opening morning of the forum: “Beyond Brexit, we’re excited about the opportunities in credit.”

Rake urges audience to preserve trust

BT Group’s chairman stresses the importance of transparency in the post-crisis era

Delivering the keynote speech at PDI’s Capital Structure Forum in London, Sir Michael Rake reflected on the financial crisis and its aftermath. “I thought it would take 10 years to fully unravel from it and we have two years to go,” he said.

The chairman of telecoms giant BT Group and online payment specialist Worldpay said the fuel for the fire pre-2008 had been too much complexity and not enough transparency, referring to “an alphabet soup of products and complexity almost to the point of concealment”.

The consequences have included huge political intervention in the financial sector and enormous regulatory requirements because “there is no trust in the system”.

He noted the irony of the constraints being placed on banks which were, at the same time, being criticised for not lending enough to SMEs. This, he observed, had led to the emergence of a plethora of non-bank lenders in the UK.

He said the likes of P2P lenders and crowdfunding platforms “served a real need”, but also entailed risks: “You can see the concerns around P2P lending. How much protection is there for the consumer? Do people really understand what they’re doing?”

Transparency, he added, was vital in a world where “there is a feeling of being left behind by globalisation, trade treaties and capitalism in general”.

While acknowledging that private debt fund managers represented a “sophisticated approach”, he pleaded with everyone present to “remember the lessons of the past, keep things as simple as possible and confusion to a minimum, so that we don’t end up with another crisis”.