Although some social distancing restrictions are being relaxed, the global pandemic continues to influence markets in a variety of ways.
This note combines snapshots of the trends in market behaviour, conversations and instructions that we are currently seeing across different aspects of Banking and Finance work.
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Logistics and healthcare driving real estate activity
The global pandemic has accelerated real estate trends (such as increased working from home and the accelerated growth of online retail) but UK commercial real estate in its various guises (and the associated popularity of structuring ownership through the Channel Islands) remains a resilient asset class and we are seeing increasing financing activity linked to political stability in the UK as well as the roll-out of its vaccination programme. Logistics assets are unsurprisingly “hot items” in acquisition and development financing with online retail driving demand in business parks, distribution centres and warehouses.
Healthcare assets are also in demand and we have recently acted on a number of transactions involving acquisitions and refinancing of care homes. Otherwise, a broader base of investors looking at the build to rent sector, the flight to quality in the office sector and gradual reopening of the UK hospitality sector (and associated popularity of the “staycation”) are all driving financing needs. These, combined with the broader base of lenders in the market mentioned above, are making for strong demand in offshore real estate financing.
Increasing demand for enforcement advice from the start of a deal
We are increasingly seeing “new money” deals in the market, both from traditional bank lenders and alternative lenders. The legacy of the pandemic however appears to be a cautious approach in the market, manifesting itself in lenders looking for security enforcement advice at the outset of a transaction. In the offshore context, lenders are looking more closely at the proposed share security over the offshore HoldCo and/or PropCo, and at any local asset level security (including over limited partnership interests). Lenders and secured parties should be aware that there is no concept of a receiver under Jersey or Guernsey law and that the role of security enforcer therefore falls to the security agent (or lender on a bilateral deal). In this market well-advised secured parties are looking to ensure that not only do they have the necessary tools at their disposal should they need to enforce (title certificates, instruments of transfer, etc) but that they are fully cognisant of the enforcement process and their duties as the enforcer.
Guernsey aircraft register a popular temporary home for commercial aircraft
Over the last 12 months the Guernsey Aircraft Register (2-REG) has seen a rise in the temporary registrations of commercial aircraft taken out of service and being stored or transitioned between operators, a trend we expect to continue. Whilst the global pandemic has had an impact on the popularity of 2-REG it is important to note that prior to the pandemic, 2-REG had established itself as a popular choice for both temporary and interim registrations with a steady track record For financiers of aircraft, 2-REG is attractive because Guernsey provides a stable jurisdiction, non-Guernsey law mortgages over an aircraft can be registered on the 2-REG Guernsey charges register (without a need to repaper or enter into a local mortgage), and the Cape Town Convention has been given effect under Guernsey law meaning creditor protections and enforcement provisions designed thereunder are available to financiers in respect of security registered on the 2-REG charges register.
Amend and extend
We have seen an increase in facilities being amended and extended during the past year compared to new financings. Where such amendments are made, lenders are taking the opportunity to review their existing security package and its robustness. In circumstances where the original pre-pandemic financing terms were more relaxed, they are sometimes being tightened. Increasingly, lenders are re-taking security as part of amendments rather than relying on a security confirmation, with all obligors signing the amendment documents. Where lenders have provided financing to different structures within the same overall ownership (particularly in private wealth structures where ultimately owned by the same trusts or high net worth individuals), we have also seen an increase in the requirement for cross-collateralisation of facilities as part of the amendments, to enhance the protection of the lender.
More use of high yield bonds to refinance debt
We are seeing a significant rise in the number of high yield bond listing enquiries that primarily come to us from leading law firms in London and New York. The increase we are seeing in new high yield bond issuances is partly due to the economic effects of the global pandemic, with many companies taking the opportunity to refinance their debt at lower rates and longer maturities and therefore managing their default risk. This is resulting in demand by investors for income in the high yield market and taking a view on defaults rates remaining low, over the longer term.
Interesting data from Fitch Ratings shows that c. EUR36 billion European high yields bonds have been issued so far in 2021 and Fitch Ratings expects new issuances of EUR125 billion in 2021. The International Stock Exchange (TISE) is one of the most popular listing venues for high yield bonds. This is partly due to the location of TISE, as it is based in the European time zone but outside of the EU and therefore the EU’s Market Abuse Regulation does not apply to securities listed on TISE. TISE provides a fully regulated market place and their listing rules and listing process are less burdensome and costly compared to certain other EU exchanges.
Alternative sources of capital finding gaps in the market
Traditional UK and US lenders are continuing to focus on supporting their existing clients through the pandemic. As a result, we are increasingly seeing alternative lenders plugging liquidity gaps in the market, particularly private debt funds. We anticipate that the growth of non-bank lenders is likely to continue since investors have experienced improved access to alternative and increasingly attractive finance products. Asia-Pacific banks are also continuing to be some of the most active in the real estate sector.