At the start of this month Axa Group was poised to announce its fourth tie-up with a European bank whereby Axa will provide loans to small and medium-sized companies. With an abundance both of liquidity and of long-term liabilities, Axa and other insurers have the exact opposite problem to many of the European banks that are still deleveraging. Axa wants to put on long-term assets, not shed them.
Last year, the global insurer struck deals in its home market with Société Générale and Crédit Agricole CIB to originate such loans for its balance sheet. In June this year, Axa signed a similar agreement with Commerzbank to participate in newly originated syndicated loans, club deals, bilateral loans and Schuldscheindarlehen for mid-cap companies in Germany that count Commerzbank as their house bank, as well as for similar borrowers in Austria and Switzerland.
Speaking at a Euromoney conference on institutional and alternative lending in London in September, Emmanuelle Nasse-Bridier, chief credit officer of Axa Group, said: "We want stable, resilient and predictable cashflows." Axa can’t find them in the bond market and so is looking to loans. She says: "The fixed-income market has been extremely volatile, which runs against our desire for predictability. We have a fixed-income market that is not very efficient today and as all our holdings are marked to market, our own solvency measures can be highly volatile partly as a result."
High volatility has particularly put Axa off investing in bank bonds and it is diversifying its exposures to sovereigns and corporate credit, targeting a list of assets that banks no longer want to hold, including shipping and aircraft loans, infrastructure loans and corporate credit. Nasse-Bridier suggests Axa might eventually build a €10 billion book of infrastructure loans and might soon be lending €1 billion a year to SMEs.
Several European jurisdictions limit the ability of non-bank institutions to make loans. As French banks delevered in 2011 and 2012, Axa found French regulators keen to ease its path into the loan market. They recently cleared obstacles to it matching bank loan assets against long-term liabilities.
Across Europe, policymakers are keen to encourage SME lending, including from new sources. Anthony Fobel, head of direct lending at BlueBay, underscores the urgency: "SMEs are crying out for capital while banks’ attitude to lending is much more constrained, with loans available only on higher terms if at all. We’re getting companies coming to us saying banks just won’t lend to them."
Peel Ports Group, an operator of ports in Liverpool, Glasgow and Sheerness, is something of a bellwether for the UK economy. Eager to get ahead of a £1 billion maturity bulge in its bank facilities looming in December, chief financial officer Graeme Charnock sought to refinance at the end of last year and to raise £300 million for capital expenditure in Liverpool. "It soon became clear that we wouldn’t be able to do all of our refinancing with our existing banks. That was a non-starter," he says. In the years before the financial crisis a lot of European banks had joined the large UK lenders in its bank facilities. These were now retrenching. And although Peel Ports was able to complete its refinancing with support from new and more liquid lenders including US and Australian banks, it had to turn to a European Investment Bank facility for its expansion financing and tapped the US private-placement market.
Having set up new three-year and five-year facilities at the start of 2013, it has since tapped new lenders. "We have already refinanced £200 million of our £300 million three-year term loan in the institutional market. That simply wasn’t there 12 months ago," says Charnock. "We will look to do more. It helps that we are in the infrastructure space that makes us attractive to a number of new funding providers."
As the new institutional loan market develops in Europe, specialist managers, attracting allocations from insurance companies, pension funds and sovereign wealth funds, are targeting particular niches: long-dated infrastructure debt; real estate debt – at least one fund is being set up to lend to Spanish commercial property – and refinancing of geared portfolio companies owned by private equity sponsors.
But just as policymakers seek to encourage new lenders for SMEs, their accommodation of the fragile European banking system is, ironically, delaying its repair. "Corporate lending has actually been a good business for banks. Default rates are low and recovery rates high," says Andrew McCullagh, co-head of origination at HayFin. "The idea that banks are in wholesale retreat is easy to over-state."
Market consensus is that around $10 billion of institutional capital has been allocated to direct lending in Europe so far, the equivalent to perhaps just one business development company in the US. Most of the managers of those European funds seem to have crowded into the Euromoney conference, many quietly muttering about the delays in getting funds invested.
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| Richard Bartlett, head of debt capital markets and corporate risk solutions at RBS |
A year ago, the fear was that banks wouldn’t roll over three-year to five-year loans to SMEs. Kept liquid by central banks and now hungry to grow earnings, the banks are lending again, often on tighter terms, provided as a loss leader for ancillary business, than institutional loan fund managers have promised their end investors. Jonathan Pughe, head of EMEA loan syndicate and sales at RBS, says: "Increasingly what we hear from banks is: ‘I don’t have enough drawn assets’. Banks have loan-to-deposit ratios they could only have dreamt of three years ago, far too much liquidity and massive capacity to lend."
It remains to be seen if a more robust attitude from the single supervisor in the run-up to banking union will renew the pace of deleveraging and balance-sheet repair. Banks are hungry to lend now. "This is one of the most conducive lending environments we’ve seen in five to six years," says Richard Bartlett, head of debt capital markets and corporate risk solutions at RBS. But this might merely mark a pause on the long road to much greater institutional provision of loans.
Sean Malone, head of syndications EMEA at Bank of Tokyo-Mitsubishi UFJ, sees that trend re-establishing itself in the medium term. "When tapering finally kicks in, the cost of banks’ funding and capital will go up and the value of assets on their balance sheets will go down. But that might be in 12 to 18 months; it’s not now."
