The votes have been counted, election results certified and inauguration is a week away. Once unthinkable, a Donald Trump presidency is now an impending reality, and one that some say could fundamentally alter mid-market lending.
The dominant themes in the proliferation of private debt have been commercial banks’ retrenchment from lending to companies outside the large-cap space due to tighter federal oversight and investors scrambling for higher yield. Market sources have said in recent months one of these factors might be materially changed.
Trump as a candidate advocated looser regulations in the US. In the years of President Barack Obama occupying 1600 Pennsylvania Ave, financiers experienced a crackdown on some activities and more stringent rules governing others. The result, of course, was the rise of alternative lenders, and those firms pouring more money into mid-market companies.
The president-elect will likely enact his agenda, as the Republican Party controls all the levers of the sausage-making process of crafting laws. This would include rules that are more favourable for commercial banks. But regardless, it is hard to believe banks would come back to mid-market lending in full force.
Understanding the nature of the American political system, rulemaking process and courts is a crucial aspect of this reasoning. Congress, the legislative branch, holds elections every two years, making congressional majorities ephemeral, which is the opposite of what financial markets and their actors hope for. They want certainty, or so they often profess. Learning the ins and outs of new statutes and how to comply with them takes time, particularly those as complex as capital requirements and the like.
The rulemaking process for federal agencies drags on before statutes are finalised. Those writing the regulations must issue a proposed draft and solicit public comments. The respondents can range from consumer advocacy groups and labour unions to financial institutions and consortia of senior executives. As a result, financial markets might be left with only drafts of the rules for some time.
Next come the courts. They have become arenas for political showdowns in recent years as opponents of legislation file suits over parts of a law, or an entire law, they don’t like. This is a process that takes years and also doesn’t lead to certainty. A notable example: the lawsuit over the legitimacy of Obama’s landmark healthcare law did not receive a final judgment until two years after the plaintiffs filed the challenge.
The relationship between banks and alternative lenders could be defined this year by an increasing number of hybrid deals – a structure that lets banks occupy the first-lien space and non-bank firms the second-lien space. One source we canvassed attributed this to the banks pulling back from lending second-lien.
The growing influence of private credit firms is a secular change. Of course the asset class may be more or less successful in capital raising or closing deals depending on the general shape of the economy, merger-and-acquisitions activity and a host of other factors. But regulatory policies may make less of a difference than some think.
While “more of the same” doesn’t make for an exciting observation, it would lead to greater certainty in mid-market lending, something that many will no doubt appreciate.