Friday, 13 January, 2017

The Opportunity in the European Debt Capital Markets

Capital markets refer to the financial markets that companies or other institutions can access to raise long-term funding, usually through equities or debt. In the debt capital markets, there are various instruments firms can use such as bank loans, bonds, and medium term notes. The level of bank loans vs. bonds has changed in recent years due to changes in regulation made after the financial crisis.

What has changed in debt capital markets after the financial crisis?

One of the big changes in the market is the reduced lending ability for European banks. Due to the increased regulation of banks after the financial crisis, banks now have to hold more capital in their balance sheets to adhere to capital requirements stated by the Basel III accord, a global regulatory framework instituted after the crisis. This development means that a large number of banks are more constrained in providing new loans while also being tasked with offloading loans they already have on their balance sheets.

However, this also means that companies are finding it difficult to get a bank loan and now have to look for other ways to get funding to run their business. Disproportionally impacted are smaller companies with lower credit ratings who banks, due to new regulations, have determined as too risky to lend to.

Emergence of non-bank lenders

Since this development, more companies and individuals now tap into the growing market of alternative lending, which relies less on bank loans and more on individual investors (e.g. crowdfunding, peer-to-peer lending) and institutional investors (e.g. insurance funds, private equity funds, investment banks) who buy loans, bonds, and other instruments.

Running parallel to this trend are historically low interest rates in many areas of the developed world, where investors are not even deterred by negative interest rates when investing their money in low-risk asset classes such as Euro-denominated cash in bank accounts or European government bonds. While investors have historically been involved in “alternative lending”, they are moving more and more into the gap that banks have retreated from in the past few years.

The opportunities for trust companies in the alternative lending industry

Many instruments involve a trustee and/or an SPV, and in many instances through an orphan structure, therefore making many forms of these alternative lending instruments presents an opportunity for the trust industry. Examples of these instruments are:

  • SPVs which buy non-performing loans from banks, financed by bonds that are bought by alternative investors
  • An alternative to bank loans for infrastructure projects, investors have used project bonds to finance long-term infrastructure
  • Direct lending funds which facilitate lending directly (hence the name) from investors to corporate borrowers

Vistra’s capabilities in the Netherlands

Vistra has a long history of servicing debt capital markets transactions domiciled in the Netherlands, and is one of the more popular jurisdictions for alternative lending structures due to the stable economic and political environment, favorable business policies, and a highly skilled workforce. In many multi-jurisdictional transactions, a Dutch foundation (stichting) is used to achieve an orphan structure.

We can provide corporate services to SPVs, as well as act as a security trustee to underlying assets that are used to secure the debt instruments for investors.

If you do have any questions surrounding the topic, please do not hesitate to get in touch.

Events

Berlin | 26 Feb - 1 Mar
Hong Kong | 2 Mar
Krakow | 8 Mar
Hong Kong | 12 Mar
Cannes | 13 Mar - 16 Mar
Bucharest, Romania | 28 Mar - 29 Mar

Archive

Recent Newsletters