Panel, Conference Presentation
London Summit 2015 - Unlocking Europe's Capital Markets (I)
- Participation rates are projected to be approximately 33% higher than pre-reduction levels, though the panel warns that daily liquidity from "hot money" in ETFs and overnight funds may introduce instability similar to the 2006–2007 environment due to a lack of investor product understanding.
- The European Capital Markets Union (CMU) is anticipated to foster a more competitive and harmonized market, yet the speaker predicts member states will struggle to abandon separate legal systems, potentially perpetuating disparities where capital reaches peripheral nations like Italy and Spain slower than desired while German corporates remain reticent.
- Structural shifts toward non-bank lending and the expected growth of the direct lending market are forecast to attract institutional investors seeking 14% to 15% unlevered returns, despite a challenging environment driven by an oversupply of capital and banks offering cheap financing with low standards.
- Regulatory changes, specifically Solvency II, are expected to prevent European banks from holding asset-backed securities or CLOs, thereby removing their balance sheet appetite and likely preventing a return to pre-crisis CLO outstanding levels, with institutional investors instead purchasing higher-rated CLO debt for infrastructure projects.
- Market dynamics are expected to be challenged by a shortage of qualified CFOs and capital markets staff, rising interest rates that could make debt servicing difficult for highly levered companies despite floating rate notes, and the risk of technical price volatility, while fundamental credit quality is projected to remain stable except in oil, gas, mining, and minerals.
- Private placements and alternative lenders are expected to compete with banks, who often use loan products as loss leaders, while standardization of documentation aims to facilitate scaling and cross-border transactions, even as debtor-friendly laws in countries like Germany may disincentivize lending and lead to downgrades for companies with heavy exposure to the stagnant European economy.
- Risks include a potential "disaster" in peer-to-peer lending due to misaligned incentives favoring growth over credit risk, political instability in the Eurozone causing investor pullbacks, and the difficulty of acquiring distressed debt portfolios at significant discounts as banks lack urgency to sell assets.