Striving for healthy markets – APF and non-bank lending

1 March 2010

Paul Fisher (Executive Director Financial Markets, Bank of England) delivered the ACT Winter Paper to a packed audience at the May Fair Theatre.

For those of you who missed this fantastic opportunity to work through the Bank’s thought processes, Dr Fisher gave a detailed review of the Bank’s rationale behind the direct support for private sector activities under the Bank’s Asset Purchase Facility (APF)1. The Bank’s holdings of sterling corporate bonds and commercial paper peaked at around £3bn but Dr Fisher was clear these activities were focused on helping restore markets to health as “market maker of last resort” and that one should focus on this rather than the relatively small total amount.

All corporate assets purchased under the APF benefited from an investment grade rating. I wonder if the implicit message is that, if you can, secure an investment grade rating? Without an investment grade rating your company cannot directly benefit from the bank’s activities as market maker of last resort.

More generally, many non-bank investors in Europe do require a credit rating (not necessarily investment grade) before they may invest. With bank funding likely to become a scarce commodity, more European companies will need to consider a rating. Of course, there is a lot of history as to why so many US companies have credit ratings and European companies don’t. And attitudes towards ratings vary. For example, in the US a non-rated company is assumed by investors to be the equivalent of CCC. In Europe, draft insurance regulation says it will assume that unrated companies are BB+. Maybe one is cynical and one naive.

The Bank of England’s activities under APF and the Discussion Paper from HMT on non-bank lending (DP) all help shape the pieces in the jigsaw that will be the "new normal". As I discussed last month, we still don’t know what this looks like.

Significant feedback on the topic was received from the Policy & Technical Committee and a good number of others to help us in responding to HM Treasury’s DP. The ACT joined a group of treasurers and others at a meeting with Lord Myners and Lord Davies at 11 Downing Street and we submitted detailed comments too2. We have attended many other meetings on this important subject. The main thrust of the comments we made to the Treasury were:

Ratings are useful and effective for larger companies.
UK non-bank lenders have a preference for rated paper. This automatically limits the number of companies that can easily seek sterling funds from non-bank lenders.
Non-bank lenders tend to be inflexible with regard to T&Cs.
Comparing borrowing costs – ok for those big enough to issue in public markets or create a pool of competing banks. For the majority, banks tend to under price headline margins and claw back using upfront fees, renewal fees, etc and high prices for other services. Of course non-bank lenders cannot offer these ancillary services and so the headline borrowing cost appears higher than from a bank.
Investor preferences are key in any fund raising. Companies will trade price for better T&Cs. Bank lending has more flexibility, early repayment/undrawn facilities etc.
Cross border funding, accessing global capital pools, is important. More borrowers will need to do this, although if moves to increase costs in derivative markets come into effect, this will reduce the attractiveness.
Development of a UK/EU private placement market would give somewhat smaller firms access to sterling non-bank finance.
Move to disclose more data on loans – fraught with communications difficulties as differences in T&Cs can be very subtle but material and important for the borrower which limits the scope for standardisation. UK listed companies already need to flag issues if material in their discussion of risk and in their consideration of "going concern" issues.

On 17 March we will be holding a breakfast discussion with Cass Business School to address the current issues of companies trying to reschedule or raise new debt. The discussion will also reflect on the continuing developments and possible obstacles in developing more efficient and cost effective mechanisms for non-bank lending. Martin O’Donovan, ACT Policy & Technical Assistant Director, will be speaking at the event. To book your place please email Zoe Norris.

Another issue we are watching is, of course, the move to require all derivatives to be cleared via central clearing house(s) and/or subject to daily margining. We believe Brussels and the UK authorities have taken our concerns on board. The US position remains unclear. However, there is growing concern that banks trading OTC derivatives with clients and not margined/centrally cleared will be penalised by "onerous" (rather than "appropriate") capital weightings. Why? If it is accepted that non-financial companies do not generally present a systemic risk, why raise costs to the point you may throttle the OTC market? This would stymie risk management. And, by making the swaps too expensive, it would strangle companies’ access to foreign capital markets. We ask that legislators think it through and complete the impact study before drafting the legislation.

Join the debate – in Germany and the UK

For our corporate members with operations in Germany and neighbouring countries, we are delighted to be partnering with the German Association of Corporate Treasurers for our next talkingtreasury forum in Munich on 18 March. Bringing together corporate treasurers to share their views and experience, this year’s programme will focus on all the biggest challenges facing treasury today highlighted above.

The ACT Annual conference is being held on 27 and 28 April in Manchester. There is plenty to talk about, so come and join in. On the platform we have economist Professor Tim Congdon, Pierre Yves Gerbeau of X-Leisure, Richard Lambert from the CBI, broadcaster Mishal Husain and a galaxy of speakers plus 50 exhibitors and a host of key topics on the agenda. You, or your team, need to be there.