IFR Editor-at-large Keith Mullin
But while some of these initiatives are worthy, they won’t solve the problem. In a situation where the UK financing gap is estimated to be as high as £190bn (US$304bn) over the next five years, the problem of lack of credit isn’t going to get better any time soon. But some of the solutions could provide a boost to capital markets activity.
A case in point on the scale of the problem: the first tranche of UK government guarantees under the National Loan Guarantee Scheme, which went live on March 20, will only amount to £5bn and rise to an aggregate of £20bn over three years (although UK finance minister George Osborne did say he’d increase it if it were working well).
But it’s a bit of a wonky scheme: banks apply for government guarantees (for a fee) to cheapen their cost of wholesale unsecured funding, and then lend the proceeds to small businesses (those with a turnover of up to £50m) at a discount of up to 100bp.
So far, Barclays, Bank of Scotland, Lloyds TSB, NatWest, RBS, Santander and new bank Aldermore have signed up to the scheme. But it’s not exactly a world-beater when small business lending can be eye-wateringly expensive- – and where 1% won’t make much of a difference in the majority of cases.
Similarly, the Business Finance Partnership is making available just £1.2bn. The BFP is focusing mainly on co-investment with private sector fund managers via funds that lend directly to mid-sized UK businesses on fully commercial terms; BFP will also make cash available via peer-to-peer lending (P2P) networks and supply-chain finance. RFPs to fund managers went out on February 20; short-listed managers are Alcentra, Ares, Cairn Capital, Haymarket, M&G, Palio Capital Partners and Pricoa Capital.
Elsewhere, in his budget testimony to the Treasury Committee on March 27, UK finance minister George Osborne confirmed that the government was looking into a scheme to securitise SME loans, but he was vague on exactly what the government’s role would be and how the scheme would work.
Scary statistics
The statistics relating to the use of non-banking finance in the UK are scary. Only 257 of 1.2 million UK companies have a financing mix that includes public bonds, according to the recent government-sponsored report fronted by Legal & General CEO and ABI chairman Tim Breedon – “Boosting Finance Options for Business”. Only 61% of FTSE 100 companies issue public bonds; only 3% of small businesses use external equity funding, whereas 55% use credit cards; and while over a third of mid-sized businesses know how mezzanine finance works, only 1% used it in 2010.
The Breedon report looked into a whole range of ideas to boost the development of UK capital markets and other alternative sources of finance. It was well thought out, if top-level. Problem is: the lag between the government formally adopting any of the report’s recommendations and getting funds flowing to companies that are cash-starved now is likely to be extended. And of course it runs the risk of being yet another government-sponsored report that, while worthy, goes nowhere. That is exactly what happened to the previous government’s proposal on the creation of a mid-cap bond market.
The Breedon report recommendations include proposals to create two agencies and unify the government’s smörgåsbord of finance schemes under a single brand. The report likened the combination of these agencies to Germany’s KfW: “Combining our proposals into a KfW-type structure would provide a mechanism to address the market failures impacting the supply as well as the demand barriers preventing businesses from accessing non-bank finance,” the report said.
Among other recommendations are:
- A feasibility study, led by AFME, to explore the creation of an aggregation agency to lend directly to SMEs and/or to pool SME loans to facilitate SME access to the public corporate bond markets
- An increase in the number of UK-based private placement investors through an industry initiative led by the Association of Corporate Treasurers. (44% of the FTSE 350 and 40% of the FTSE 250 have private placements outstanding, for as little as £20m).
- Increased retail investor appetite for UK corporate bonds through electronic retail-dedicated gilt products available through registered stock exchanges, with tax incentives for investors
- The BFP to make investments in online receivables exchanges,mezzanine loan funds; and P2P lending platforms.
So far so zero
The arguments around a UK mid-cap bond market have been well rehearsed. Issuers find issuance costs prohibitive and the level of disclosure investors demand onerous, while investors demand either significant size (£150m- £300m), exact very high spread premiums that make the exercise uneconomic for issuers, are unwilling to do the credit work, or look for longer-dated paper than issuers are prepared to contemplate.
“Upfront costs only limit the economic viability of bond issuances to c.£25m. Mid-sized and mid-sized+ businesses can therefore issue public bonds only if they can find investors who do not have concerns regarding liquidity, credit rating, or size of issue,” the Breedon report noted. Great point, Tim, except that that excludes, er, everyone.
Breedon suggests a way forward would be to pool a large number of SME loans and finance them via the corporate bond market. This would be done by a new agency (project name is the Agency for Business Lending), which would aggregate and finance SME loans by establishing a large-scale fund to buy SME loans and SME-loan backed securities from originating banks.
“ABL could finance these activities by issuing securities on the public bond markets to institutional and retail investors. In addition to its SME lending activities, ABL could play an important role in accelerating the redevelopment of the SME loan securitisation market.”
