Are alternative forms of finance still worthy of that name, or are they now part of the mainstream? With the gap between the supply and demand for financing widening, more and more companies are turning to specialist providers. What’s more, the fact that this group includes some of the largest and most famous companies in the world suggests that alternative forms of finance are not only here to stay, but are no longer “alternative”.
This issue was one of those forming the basis for the Falcon Group’s seventh annual Trade & Corporate Finance Forum held last month in Dubai. Entitled ‘Specialist Lending for Challenging Times’, the 2016 Forum opened with an analysis of current market volatility, which includes fluctuating stock and commodity prices, economic growth figures revised downwards from the International Monetary Fund (IMF) and continuing bank retrenchment; all of which are having a detrimental impact on the global economy. Certainly such volatility is having a pronounced effect on the global supply of credit, making this a challenging period for borrowers.
The banks pose a particular problem. Most are constrained by the regulatory need to clean up their balance sheets, which means taking on less risk. Many have also been hit by first-quarter losses. All of which means they have less money to lend, as noted by Emma Clark, head of UK and Europe business development at Falcon:
“Regulatory initiatives have been focused on ensuring that banks have enough capital and that they do not fail,” said Clark. “That’s still happening. Add current bank losses – as well as the constraints on balance sheets – and banks, physically, have less money to spend and to lend.”
Most economists back this view, even seeing it as a chronic condition. “Weak credit growth has persisted even when volatility has abated,” said David Smith, economics editor at London-based The Sunday Times and a Forum speaker. He underscored the fact that global banks have had to cut back on riskier areas of activity, particularly with regards to cross-border lending, instead opting to focus predominantly on core clients in domestic markets.
Both the 2008-09 global financial crisis and its regulatory aftermath are raising fundamental questions concerning the role of the banks sector, especially with respect to corporate finance. For instance, the public bailout of banks has led some to the view that theyshould focus lending primarily to their domestic economies rather than operate internationally or, even, seek returns on employed equity.
This view was further echoed by V. Shankar, chief executive officer (CEO) of financial risk advisors Gateway Partners and former CEO for Europe, the Middle East and Africa (EMEA) and the Americas for Standard Chartered, who was the Forum’s keynote speaker:
“The financial crisis has placed the traditional banking system under a fair degree of stress,” said Shankar. “Today, banks suffer from a cornucopia of regulations. With increased capital requirements, banks have had to ring-fence their operations and are forced to become Balkanised under the belief that banks are global in existence but become purely a local problem when they fail.
“The old days of employing a high amount of leverage and relying heavily on off-balance sheet trading are no longer available,” he added. “As returns on equity (RoE) have decreased banks have, naturally, retrenched from many of their previous markets. Post-2008, regulations have put the economic equation of running a bank in a completely different light.”
Corporate commentators agree with this assessment including Gurpreet Singh, head of fleet and corporate sales for the Middle East, North Africa, Afghanistan and Pakistan (MENAP) at carmaker Jaguar Land Rover (JLR), who said: “With the pressures on liquidity, banks are no longer in a situation where they can look at clients in the same manner that they used to. This is where specialist financing becomes vital.
“In such times, corporates should explore non-banking solutions. Specialist and bespoke financing plays a key role in providing much needed support to transport and infrastructure projects.”
Non-bank financing options
Indeed, the obvious conclusion (and key point of the Forum) is that corporates – both large and small – are being underserved by the big banks and should, instead, look to specialist lenders.
Corporates could also seek funding from their shareholders, suggested Emma Clark, although she also added that this could generate objections. Alternatively, they could tap their suppliers or customers for credit, she said, although this will likely harm their business model. Far easier, it seems, to look towards the growing specialist finance industry.
Certainly, the specialist finance industry has witnessed dramatic growth in recent years by providing comprehensive solutions tailored to specific business requirements. As regulators continue to clamp down on “excessive” risk-taking by the banks, the appetite for specialist lending is certain to grow. Non-bank financiers have turned the travails of shrinking bank balance sheets to their advantage.
What’s more, specialist financing solutions are growing in sophistication; again, driven by strong demand from the corporate sector and particularly those looking to diversify funding sources.
“Specialist finance is something that is more specific to your business requirements said Clark. “It’s tailored to suit your needs at a specific time or project and it’s flexible – you can choose how to put it on your books. What’s more, it’s really quite simple.”
While the 2016 Forum addressed current constraints in corporate funding, it also – more positively – shed light on the prospects for economic growth, especially in the emerging markets (Ems).
“I’m a big believer in EMs for four key reasons,” said Shankar. “Firstly, demographics: with two-thirds of people under the age of 35, emerging economies will act as a powerful driver for consumption. Secondly, two billion people are set to become urbanised over the next 25-30 years – again boosting consumption. Thirdly, if we combine demographics and urbanisation, this means huge growth for both manufacturing and services. Finally, foreign direct investment (FDI): more than half of which now comes from EMs, thus indicating a massive paradigm shift.”
In fact, over the past 20 years south-south trade (trade between EMs) has outperformed both world and south-north trade. With tightening lending norms, the funding gap in both emerging and developed markets is set to widen – generating huge opportunities for specialist lenders.
“We have seen all over the world – India, China, Kenya, America, Japan, United Arab Emirates (UAE) – the growth of specialist firms focused solely on specialist client needs,” said Nam Sahasra, UAE regional head at Falcon Group. “The industry is growing and we are honoured to be pioneers in this new and exciting sector.”
When it comes to the relationship between Europe and Britain – uniformity isn’t a word that currently springs to mind. And that’s not just a reference to Brexit. Whilst the Europe and Britain do find themselves in the midst of a political break-up – their monetary policies are also showing signs of divergence.
Europe’s introduction of the General Data Protection Regulation (GDPR) next May will have implications for businesses around the world and US corporates should start getting ready if they haven’t already done so.
The recent NotPetya cyberattack underlined the need for organisations to address their exposure and how to mitigate the risk.
As anticipated, US organisations exited prime money market funds en masse following last year’s SEC reforms. AFP’s latest Liquidity Survey indicates what it will take to encourage them back.