Like most crises before, this time is completely different and completely the same. But one aspect of the predicament we and the markets find ourselves in is clear already - it is not a crisis of liquidity as was the case in the late 00's. Instead liquidity is plentiful, the question being where will that liquidity find a home in the face of heightened uncertainty and a shifting geopolitical and economic landscape?
The level of volatility and uncertainty we have seen in financial markets in the past few weeks and months is unique in over a decade. A perfect storm of geopolitics, high inflation, interest rates, supply chain concerns, commodity shortages and shocks to markets many claimed were uncorrelated have all come together in a remarkable short period of time. But then again and as often before, economic and financial crisis are at once totally predictable and totally unexpected.
While we are busy getting reacquainted with base interest rates that are measured in percents rather than basis points, the team at Altimapa has spent some time in recent weeks having conversations with market participants. We took notice of the key messages that we heard repeated on how the current circumstances impact markets and, given our focus, debt markets in particular.
From the lenders:
- The most important message that we heard over and over again from lenders is that they are still lending:
- On the banking side, capital ratios are robust and banks are for the first time in a long while making a profit on their lending, as deposit rates are more sluggish than their lending complements.
- Among private lenders, it is certainly a harder now to raise new capital, but by no means are markets closed: several of our lending counterparts are expecting to close new funds in Q1 of the coming year. Furthermore capital raising in private debt was strong in the last couple of years, while deployment of those funds was slow. Hence, "dry-power" is considerable across the debt market. And finally, unlike private equity that has come to rely on plenty of cheap debt to operate profitably, debt funds do not rely on low base interest rates to be successful.
- On the question of pricing, private lenders are less sensitive to base rates when compared to banks. Hence they have become more competitive, even on those occasions when they have also been able to charge higher rates.
- Nevertheless, lenders have commented that their lending policies have tightened. Some lenders have also commented that competition for deals is lower in recent weeks, which would seems to confirm the former.
- Lending policies have tightened the most, probably in the UK which has added spectacular political gyrations to the portfolio of problems all economies are facing. In particular, US and EU lenders seem to be taking a leave of absence form this market. Luckily the UK also benefits from a strong internal market so the impact is not as dramatic as it would be elsewhere.
- By contrast with direct lending to the economy by banks or private institutions, capital debt markets (and probably equity markets as well) are mostly closed due to the various volatilities inflicting markets.
- Real-estate has seen the most immediate impact, since higher rates affect both the profitability of development projects and the discounted cashflow valuation of mature assets.
- On the other hand, there is little evidence just yet of distress among most corporates. Having said that, one events organiser has commented to us that all insolvency advisors seem to be missing in action, which suggests problems are brewing but are yet unseen.
- We are also closely following the non-bank platform lenders. Either peer-to-peer or institutionally backed most operators have not experienced an environment such as we see today, since most were not in existence during the last financial crisis. Furthermore we are closely watching the platforms that have grown with retain funds but are paying mid-single digit returns. While such funds can be sticky, it is less obvious why the investor wouldn't move their funds to the Gilt market that just last week was paying over 3% across the curve.
We hope the above is helpful in providing some colour as we all try to deal with the circumstances and steer our businesses as best as we can.
Altimapa Capital is a regulated corporate finance firm focussing on raising debt capital for companies and institutions. Based in the City of London, we operate globally, working with an extensive panel of lending institutions. Our team of specialists arranges and advises clients across the debt spectrum, and have experience in working capital finance, acquistion finance, growth and venture debt, distressed, trade finance and real-estate debt, to name but a few.