Apr 27, 2021

Tightening credit conditions highlight role for innovative financing in the UK and EU


Two recent central bank surveys in the European Union and United Kingdom paint a picture of increasingly inaccessible and expensive bank financing, especially for businesses. The cost of borrowing in debt capital markets also looks set to rise. The current environment highlights the need for specialist capital providers.

Financing from banks is becoming increasingly difficult to access in the fallout from Covid-19, according to two recently published central bank surveys in the European Union and United Kingdom.

The latest Bank Lending Survey by the European Central Bank shows a clear tightening of credit standards for loans to firms in the fourth quarter of 2020. “The tightening was driven mainly by banks’ heightened risk perceptions, reflecting uncertainty around the economic recovery and concerns about borrowers’ creditworthiness in the context of renewed coronavirus-related restrictions,” said the ECB. The findings of its survey of 143 lenders also reveals that they expect conditions to be squeezed further in the first quarter of 2021.[1]

In the United Kingdom, the Bank of England’s Credit Conditions Survey for the final three months of 2020 found overall credit availability declined for small firms, although it did not change for the corporate sector as a whole.[2] The survey also showed widening credit spreads over benchmark rates for secured household loans and corporate debt, with the cost of corporate borrowing expected to keep rising in the first quarter of 2021.

Reasons for optimism

“There are reasons for optimism with vaccination programmes accelerating and European economies starting to re-open,” says James Mungovan, Managing Director, Europe, EquitiesFirst. “Individuals and businesses see opportunities for growth in the future, but when it comes to accessing credit, many borrowers are finding that their traditional lenders are more constrained.”

“Even as the supply of credit from traditional sources is becoming tighter, we are seeing some strong and distinct drivers of demand from borrowers,” adds Mungovan. “In the sectors where cashflows have been hit hardest by the pandemic, like aviation and hospitality, debt refinancing is a priority. However, in industries like fintech and healthcare, investors feel now is the time to inject capital to finance growth.”

Unprecedented stimulus

During the pandemic, the UK and the European Union have rolled-out unprecedented spending programmes intended to provide a safety net for firms and households. This spending has buoyed economies – and many asset prices – by releasing enormous volumes of liquidity.

According to the Brussels-based think tank, Bruegel, the UK has spent 8.3% of its 2019 Gross Domestic Product on “immediate fiscal impulse” measures alone, with considerable further support in the form of payment deferrals and other liquidity measures and guarantees.[3] The EU’s EUR1.8 trillion recovery plan is the largest stimulus package to have been financed through the EU budget.[4]

Challenging conditions

Debt capital markets have boomed since the beginning of the pandemic as borrowers sought to capitalise on easy monetary policy conditions and lock in low funding costs. Global bond issuance rose 18.2% year-on-year in 2020, according to S&P Global Ratings. US Treasury yields have been rising in 2021, signalling a potentially higher cost of borrowing in capital markets.[5] As credit conditions become increasingly difficult for borrowers, Mungovan sees further opportunity to provide innovative capital solutions for clients.

Equity loans

“As a specialist financier, we are frequently invited by other financial institutions such as private banks to collaborate on opportunities where they may not have the appetite or risk parameters to take on themselves,” says Mungovan.

EquitiesFirst is a global investment firm that provides innovative loans against the listed equity assets of long-term, concentrated shareholders. “Our role in the community is to provide progressive financing solutions for the borrowers we partner with. As the lending environment becomes more challenging, our ability to be flexible in our lending parameters means we usually see an increase in demand.” 

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[1] https://www.ecb.europa.eu/stats/ecb_surveys/bank_lending_survey/html/ecb.blssurvey2020q4~e89c77d212.en.html

[2] https://www.bankofengland.co.uk/credit-conditions-survey/2020/2020-q4

[3] https://www.bruegel.org/publications/datasets/covid-national-dataset/

[4] https://ec.europa.eu/info/strategy/recovery-plan-europe_en

[5] https://www.spglobal.com/ratings/en/research/articles/210128-credit-trends-global-financing-conditions-bond-issuance-could-decline-3-to-8-trillion-in-2021-11817830#:~:text=Global%20bond%20issuance%20in%202020,up%2018.2%25%20relative%20to%202019.&text=Financial%20services%20issuance%20expanded%2016.6,mark%20for%20the%20first%20time.