As the world reopens after two years of COVID lockdown, the conference circuit is no exception. My CSC colleagues and I were eager to reconnect with industry peers and hear insights into the state of the loan market. Interestingly, regardless of region, several common themes emerged and the following captures our takeaways.
1: All signals point toward a recession
The conferences provided stark warnings that we’re headed towards a recession. Speakers hinted at factors that are pushing economies in that direction:
- We now have an inverted yield curve
- Inflation is making credit markets more costly to borrowers and less desirable to investors
- The Fed is pushing interest rates higher to try to curb inflation
Across both U.S. and European markets, high costs of labor and high real estate values will continue to keep inflation raised, impacting credit markets. With drops in borrowers’ credit worthiness leading lenders to find higher returns elsewhere in the market, new credits are likely to slow and become more expensive as we head towards a possible recession
2: The industry has made great progress with the LIBOR close to ending
No new LIBOR loans have been issued since the turn of the year, with the transition away from LIBOR considered to have been relatively smooth. SOFR is the most widely used alternative rate for the U.S. loan market, while legacy loans still have until the end of June 2023 to transition.
- 35% of loans have hard-wired language for the transition
- 65% will require amendments or refinancing to a non-LIBOR-based loan.
The market is worth $5 trillion and will be busy as we get close to the end of LIBOR–be sure your credit is ready well in advance.
3: The impacts of Russia and Ukraine are felt, but markets have always had global turmoil
The Ukraine crisis has impacted credit markets in terms of global supply chain issues, energy prices, and global inflation. However, credit markets have always had to deal with international conflicts, and they seem to be most impacted when the global economy is impacted. If your credits have any relation to Russian entities, be sure to fully understand and stay up to date on the ever-evolving sanctions.
4: ESG is here to stay in loan markets, demanded by various participants
Investors are starting to ask fund managers to report on how their money is being used from the ESG perspective. Even without regulators requiring it, some managers are being asked to disclose and report on:
- Commitments to environmental and other green initiatives
- Gender and racial pay gaps
Some funds are finding it surprising or difficult to report on this information. Be sure to stay prepared and have this data ready, as you may be asked for it by your biggest clients.
Conclusion:
There is still a lot of money waiting and available for lending, however the impacts of inflation and a possible recession will impact how and when it is deployed.
New deals are getting done in a post-LIBOR fashion, however 65% of existing loans still require at least some work via amendments to be ready for the cessation of LIBOR next summer.
If you are a market participant, be aware of the ever-changing sanctions regarding Russia.
And remember, you don’t just need to respond to regulators; investors are starting to demand disclosures from an ESG perspective. Be sure you have the data you need to respond.
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