Stephen Langan, Director of Capital Markets, Intertrust, gives his view on the year ahead in capital markets
As we enter 2018, what’s the state of play with capital markets business in the islands?
Capital markets business in the Channel Islands is fairly steady and showing signs of picking up. Although there was a marked slowdown in new business post financial crisis, there was still plenty of work to be done with respect to existing transactions that needed to be restructured and/or were heading for a default.
Over the past couple of years, we’ve seen an uplift in new generic and bespoke transactions coming to the islands. Certain types of structure – short-term debt instruments such as commercial paper conduits, for example – haven’t really come back to the market, but we’re still seeing a wide variety of transaction and asset classes, including debt factoring, Islamic finance and real estate financing.
Synthetic securitisations are also popular with banks in terms of credit risk management and associated regulatory capital relief.
The wider capital markets industry is dynamic, with lots of moving parts. It’s hoped the anticipated scaling back of the Bank of England Term Funding Scheme – which allowed eligible banks and building societies to borrow central bank reserves – may encourage certain banks to come back to the securitisation market.
Documentation around new and existing deals will need to be amended to factor in the proposed end to Libor in 2021, and the European Commission’s simple, transparent and standardised (STS) regime will be fully implemented in the EU over the next couple of years – regulating securitisations even further.
We’re encouraged that clients and intermediaries still consider the Channel Islands to be key jurisdictions for capital markets work despite strong competition from onshore alternatives such as Ireland and Luxembourg.
Our client base is truly global, which demonstrates the international attraction of the islands to blue-chip financial institutions and leading law firms.
In the next 12 months, what do you think will be the biggest challenge(s)?
At industry events, when this question is asked, the typical answer is uncertainty around changes to legislation and regulation affecting the industry. For certain clients, this has put a brake on their ability to bring transactions to the market.
There are likely to be further changes in the pipeline for 2018, such as an increase in bank capital adequacy requirements for holding non-performing loans (NPLs) and preparation for compliance with the new STS regime. This could result in a spike in new issuance in late 2018, before the new rules come into force, and a rise in NPL trading activity.
Given the islands’ close proximity to and relationship with the City of London, any downturn there as a result of Brexit, or similar factors, would be felt here.
A change to the UK government in the next 12 months could also bring a new set of challenges.
And where will the greatest opportunity lie?
The debt capital markets have evolved in the post-financial crisis period, and whereas some traditional banking clients have (temporarily, we hope) exited the markets, some of this space has been filled by newer participants such as funds and peer-to-peer lenders.
The market is fairly fluid and firms need to be as flexible as possible in offering their services. Regulatory changes also provide an opportunity for us to step in and assist our clients in implementing the necessary procedures or reports.
The anticipated scaling back of cheap bank funding by the Bank of England may also provide some spark in the volume, pricing and spread of new debt issuance.
Is there one thing that will dominate in the capital markets sector this year?
The big trends we foresee for 2018 are, of course, Brexit, which will be a fixture in the financial markets. And in terms of asset class, access to the untapped NPL pools in southern Europe will be very topical. The expected scaling back of the Bank of England’s Term Funding Scheme should have a positive effect.
Anything else you’d like to say about the sector?
Clients advise us that securitisation works because customers want it (as do investors with limited yield available elsewhere). It’s been resilient, it provides diversity of funding, and it’s hoped the European capital markets will pick up in terms of volume in the near future.