Ashurst Global Loans UK Market Update: Pricing & tenors under pressure?

Credit markets are getting increasingly more difficult to navigate.

The corporate bond market, the faster mover in terms of debt markets, has seen shorter average tenors in 2022 and wider credit spreads. The all in cost of borrowing has also quickly tracked north as underlying rates around the world have risen.

The corporate loan market, being largely underpinned by relationship banking, is generally slower to react than bond markets. That said, as the year has moved on, there have been some signs of shorter tenors being offered and pricing (in terms of margin and fees) increasing.

SONIA, the UK replacement for LIBOR is, as I write, 2.93%. This development means even if the negotiated pricing element of any loan deal has remained steady, the all-in cost of GBP drawn debt from banks and funds is considerably more expensive now than at the start of the year when SONIA sat at 0.19%. This is also true for USD and EURO loans with SOFR having moved from 0.05% to 3.8% and 3 month EURIBOR from -0.547% to 1.821% over the same time period.

For more details on the implications on borrowers and lenders of a rising SONIA, please see attached.

Underlying rates aside, movements in terms of negotiated pricing and tenor have to date only really affected the crossover and stressed end of the market but the question is: will the status quo persist into 2023 or will we see shorter tenors and higher pricing across all credit grades and all asset classes?

As we move into the New Year we are told by banks and funds that liquidity is readily available – banks are well capitalised and funds have cash to deploy. I do not doubt these statements to be true but, more so than ever before, lenders will be selective.

Greater selectivity tends to lead to higher pricing and shorter tenors.

On pricing in addition to margin and fees trending up, we may see greater emphasis on higher fees linked to utilisation. We will see support rewarded with structures such as forward starts (as highlighted last week).?Bridge to bond structures may also become more expensive given underlying take out markets have and will likely continue to become more expensive.????

On tenors, will 3 be the new 5??Will +1s only be aligned with shorter tenors or will they come at the end of deals rather than in the first 12/24 months? Shorter term incremental liquidity lines will also bring average tenors down.

In my view the answer to the question(s) above is likely to be that, as with previous downturns, margins and fees will go up and tenors will become shorter across all credit grades. By how much will depend on a number of factors including purpose of the loan, sector, credit standing of the borrower and crucially, in my view, the strength of the relationship between borrower and lender.

Key message for me remains: communication is key. Borrowers and lenders need to talk to each other and both should pick up the phone to Ashurst.

We have many lawyers who have seen markets like these before - both bond and loan. Nothing beats experience when times get tough.

We understand it's difficult and we look forward to hearing from you.?????