Global and political risks continue to be the single-greatest influence on the syndicated loan market. Multiple important elections will occur this year, with more than two billion people across 50 countries expected to go to the polls. Meanwhile, ongoing wars in Europe and the Middle East, simmering geopolitical tensions and a slower global economic outlook are likely to be the principal causes of greater uncertainty in financial markets. These factors may act as a barrier to the growth of the global syndicated loan markets this year. Against this backdrop, we set out our predictions for the syndicated loan market in 2024.
More complicated capital structures
Driven largely by challenging macroeconomic conditions, particularly interest rate headwinds, a growing number of transactions were defined by the complexity of their capital structures in 2023. Financial institutions (both banks and private debt providers) were tasked with navigating various combinations of debt and quasi-debt instruments, seniority positions (and associated intercreditor issues) and interest payment mechanics, coming together within a single capital structure to fund specific transaction purposes.
The pace with which certain macroeconomic conditions ease will invariably be slower than the speed of their arrival. We would therefore expect complicated capital structures to remain a feature of 2024. Borrowers entering the syndicated loan market seeking “new event” financing will continue to demand increasingly creative structures aimed at maximising the debt available in a manner compatible with, and manageable by borrowers in light of, the macroeconomic environment.
More bridge financings and amend/extends
We expect 2024 to be a year of bridge financings — as well as amends and extends — with less in the way of new financings and shorter two-to-three-year tenors.
With more than 50% of respondents to a recent poll by the Loan Market Association reporting that financial regulation had materially or significantly impacted their business in the past five years, we expect the evolving regulatory landscape to continue to affect the syndicated loan market in 2024. Such changes could include the Edinburgh Reforms, aimed at differentiating the UK financial services market post-Brexit. This may, at least in part, force banks to continue with their restrictive lending policies in 2024.
Preference for series of bilateral financings among some treasurers
For some investment grade borrowers, however, a wall of liquidity is likely to be available again this year from a variety of banks. More treasury teams at investment grade companies are seeing value in entering into a series of bilateral unsecured financings on the same terms with different banks, rather than a single syndicated facility with multiple banks. While there are pros and cons of syndications versus bilaterals, there could be greater negotiating power for the borrower with this bilateral approach.
Sustainable finance
After several years of growth (and hype), 2023 saw a noticeable slowdown in sustainable financing in the loan market, particularly in the second half of the year. There are several reasons for this, including market participants adapting to the strengthened principles for green loans, social loans and sustainability-linked loans published by the Loan Market Association (LMA) in 2023.
However, the regulatory direction of travel regarding sustainability and net zero is clear (particularly in the UK and Europe), and we expect to see volumes of sustainable loans increasing again in 2024. This is expected to apply to both ‘badged’ facilities complying with the LMA Principles and non-badged facilities (which may include some of the elements from the LMA Principles).
It is possible that the LMA will publish further updated principles during 2024, but if it does so, the changes are expected to be refinements to the existing principles, rather than wholesale changes.
A rider providing standard drafting for use of proceeds instruments (i.e. green loans/social loans) is also expected from the LMA in 2024. This will be a welcome development, following the success of the sustainability-linked loan rider published by the LMA in 2023.
Lenders in particular will continue to be wary of the risks of greenwashing in this space, in light of the threat of litigation, reputational damage and regulatory scrutiny.
Restructurings and insolvencies
While we are not expecting a ‘tsunami’ of restructurings and insolvencies at the start of 2024, the challenges faced in the market do not appear to be short term. Unfortunately, we are expecting levels of restructuring and insolvencies to increase in 2024, and some transactions that were initially intended to be refinancings may become more formal restructurings if circumstances deteriorate.
The days of cheap capital seem well and truly a thing of the past. The sterling overnight risk-free rate is currently 5%, having not exceeded 1% between 2009 and 2022. Even if interest rates begin falling, the cost of borrowing will remain much higher than the low levels experienced prior to 2022, which may cause the debt levels of some borrowers to become unsustainable. This higher interest rate environment (coupled with historically high levels of inflation) is expected to impact discretionary consumer spending — for example, as fixed mortgage rates come to an end.
Unfortunately for creditors, the proliferation of covenant-lite loan facilities over the past few years may mask early warning signs of trouble and could hamper the chances of a successful restructuring.
Last year saw the return of the formal insolvency process with administrations and compulsory liquidations returning to levels not seen since before the Covid pandemic. In the formal restructuring space, we have seen continued use of Part 26A restructuring plans (with its cross-class cram down feature; 10 restructuring plans sanctioned in 2023) and Part 26 schemes of arrangement to implement restructurings. Part 26A plans are different from other processes under the Insolvency Act 1986 in that there is no need for the company to be insolvent in order to propose a Part 26A plan. Under Part 26 of the Companies Act 2006 a company may enter into a compromise or arrangement with its members or creditors, or any class of them.
Another trend we expect to see more of in 2024 is the parallel use of UK and foreign restructuring proceedings by non-UK based groups, following on from the 2023 Vroon restructuring, which was the first use of a parallel UK scheme of arrangement and the Dutch act on the confirmation of private restructuring plans known as Wet Homologatie Onderhands Akkoord.
Gemma Long is counsel and Jade Porter is an associate at law firm Norton Rose Fulbright.
