Risk v Rate
A 0.25% increase signals economic growth and brighter business opportunities on the horizon for 2016, but what does this mean for the UK lending market?
The sun is out but confusion is rife as the economy improves. Lenders are issuing credit under competitive pressures, and whilst also trying to gauge credit risk policy, at the same time as the market quickly evolves.
Interest margins are being slashed with discussions invariably ending 1.5% below where the conversation began, and that's just the margin. Understanding what lenders have offered recently is crucial to get to the lowest end of their pricing matrix.
Lenders’ arrangement fees are also compressing, with a 0.25% to 0.50% expected to be the norm in time.
In a recent fund rising negotiation the borrower was saving £50,000 per week, as we hurtled through the lender beauty parade. It's the race to the bottom on pricing, and also the race to who loses capital first.
The volume of available of liquidity continues to surprise, but as ever availability doesn't mean accessibility. Prime credit policy is tight, which is creating a large and evolving specialist lending marketplace where flexibility and speed are USP's.
From a borrowers perspective the alternative lenders can represent fantastic value. A rate of 6% may not be appealing but it can be dynamic and profitable if utilised for an asset management opportunity or to secure a debt forgiveness package from an incumbent bank.
Whatever tier of the market a transaction falls into, there is price confusion as the reward isn't reflecting the risk. Non-recourse finance is more available than ever since 2007, with lenders backing asset and economic growth.
If we base our opinion on recent experiences in restructuring and debt forgiveness, then having personal guarantees in place does ensure that the Directors/borrowers do stay at the table. This is both good news for the bank, and in retrospect oddly good news for borrowers.
If they have negotiated patiently most of the borrowers with personal guarantees have managed solvent restructures, which means they have recovered all assets, avoided personal guarantee enforcement, and had their debt written down. Whether it’s serviced by trading business EBITDA or by rental income the outcomes can have been the same.
Serviceability calculations, and more importantly sensitised debt service calculations, are being made on heavily biased assumptions to ensure that any credit issued is "safe".
How does a lender get an edge and get deal flow? I'm awaiting a third factor, but in the meantime it's simply lower pricing and loosening credit risk policy, which is great news for borrowers.
It's going to be a very interesting 2016.
Contact Jamie direct on 0131 564 0172 or email email@example.com