The Loan Market Association (LMA), in consultation with its non-bank members, has responded to a Department for Business Innovation and Skills (BIS) consultation, which aims to examine barriers preventing medium-sized businesses, small and medium-sized enterprises (SMEs) and micro businesses accessing non-bank debt in the UK.
The LMA has provided BIS with its specific recommendations as to what could be done to improve the non-bank lending landscape in respect of the provision of syndicated loans to medium sized businesses, as well as general feedback relating to issues associated with lending to smaller corporates generally.
Key points arising as part of the LMA’s response include:
1. Appropriateness of syndicated loan product to medium-sized businesses
The LMA has stressed that the syndicated loan product is an attractive, simple and flexible source of funding for medium-sized businesses (i.e. those with turnover between £25m-£500m) (mid-caps) and should not be overlooked when considering the development of alternative debt markets for such businesses in the UK.
2. The need for non-bank investors
The LMA agrees that, as many banks are deleveraging, it is important that other, non-bank, investors are found to plug the gap and ensure that the funding requirements of UK businesses continue to be met. This is particularly pertinent given the regulatory capital treatment of European credit institutions following the implementation of CRD IV (Basel III), which will make lending to the sub-investment grade sector generally less attractive for banks.
3. Non-bank investors better suited to mid-cap, as opposed to SME lending
Although it may theoretically be possible for non-banks to lend to SME and micro businesses, in practice, non-bank lenders are not set up to finance these kinds of borrower. Nonetheless, the LMA believes that, by providing more funding at the larger end of the corporate spectrum, non-bank investors can help banks free up capital to lend to smaller companies, where banks are arguably more efficient, due to existing networks and credit histories with borrowers. Alternatively, given the modest amounts required by smaller businesses, if non-bank debt were to be provided to SMEs, it would need to be part of a much larger asset management model where SME exposures could be pooled.
4. Structural and behavioural barriers to increased non-bank lending in the syndicated loan market
Regulation remains one of the key barriers stifling access to non-bank capital. The LMA has urged the UK government to assist with lobbying initiatives in this area. Caution should also be taken to ensure that proposed regulation of the ‘shadow banking’ industry does not result in unintended consequences for regulated institutional investors.
5. Importance of working capital finance for mid-caps should not be overlooked
A fundamental requirement of smaller businesses is working capital finance, as well as ancillary facilities such as letters of credit and overdrafts. These types of offering are typically not attractive to institutional investors, who are better suited to providing fully drawn term funding. The LMA has stressed that it would be difficult to disintermediate the banks entirely from the lending landscape and that banks should continue to play a key role in the provision of working capital finance. In addition, since the vast majority of transactions are currently sourced from banks, these institutions remain uniquely placed to provide the necessary origination network, especially given the regional nature of their business model and their existing relationships/credit histories with borrowers.
Clare Dawson, managing director LMA, said: “While non-bank investors are already present in the syndicated loan market, much could still be done to broaden this valuable investor base and give it a meaningful diversity. The LMA would support government incentives to encourage institutional investment for mid-cap borrowers. However, we would stress that to be successful, such incentives would need to take into account the impact of current regulatory proposals, many of which need to be resolved at a European level.”
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