The loan market proved its worth
The coronavirus pandemic, in terms of the financial markets has had its winners as well as its losers. The loan market, after years of decline as borrowers sought better terms in bond markets, has shown its worth in times of trouble by being able to offer liquidity lifelines to companies left in dire need of the stuff when other markets could not provide it.
One of the biggest changes in capital markets since the financial crisis over a decade ago has the shift in sources of corporate financing. Companies strayed from the loan market to fund through bonds and other debt instruments. Banks faced stricter capital requirements and regulations making it harder for them to lend out cash as easily.
For all the talk in some quarters of over-regulation, that demand on banks to be better capitalised now looks to have been wise. The institutions that nearly drove the financial system into oblivion in 2008 have been able to step up during the biggest health crisis in a century. They have extended lifelines to companies facing zero revenues helping them, and the economy, to stay afloat.
The situation in the investment grade loan market had grown so dire that banks had been laying off loans desk staff, such was the lack of business. But that all changed almost overnight as companies sought to draw down on revolving credit facilities and execute new, emergency loan market borrowing in the teeth of the pandemic.
Old relationships between banks and their corporate clients have proved vital. Shell, a frequent and successful borrower in debt capital markets, last month raised a $12bn loan from a group of international lenders, as it struggled to fight falling oil prices, caused by the double whammy of Covid-19's impact on demand and disputes between oil producing nations over production cuts, for example.
Although it has since been to the bond market on different occasions, it is an example of a borrower — and there were many — which found that the bond investors they had spent so long charming in recent years had abandoned them in their hour of need, leaving the banks as the only source of ready liquidity, despite facing the same market gyrations.
European lenders like BNP Paribas and Santander have risen to the challenge to serve their relationship clients by underwriting and bookrunning deals, and in the process, have increased their market share of loans.
Santander in particular has impressed by jumping from 15th place in the EMEA bookrunner league for 2019, to 2nd place for the year to date. BNP Paribas, similarly, doubled its market share from 7.95% last year to 13.8% so far this year, the result of underwriting loans for struggling borrowers — it was sole underwriter on BP’s $10bn loan and Safran’s €3bn facility, both in April.
Loans desks often appear slow to react to adverse events, reassuring anyone who will listen that the bad news of the day will not affect their ability to finance their clients. It can come across as quaint — maybe even naive. But during this crisis, it has been an approach that may have saved the global economy from an even worse peril than the one it still faces.