General round-up of news in the corporate banking world
1. Insurers: getting the deal done
Increasingly, insurance policies are becoming key to getting acquisitions (assets, shares etc) across the line. We have seen key-man insurance, property insurance and general business risk insurance in all sorts of deals for a long time but the existence of warranty and indemnity (or "W&I") insurance is becoming much more prevalent in terms of getting a sale and purchase agreement successfuly completed. Often sellers need a "clean break" (particularly if they are selling to pass on a return to underlying investors or, in the case of family owned businesses, may want to ensure their pension pots don’t deplete unnecessarily) and W&I insurance covers off the risk that any warranties they have made, or indemnities they give, in the sale agreement are or become untrue or callable. With W&I insurance, buyers still get the comfort they need on the quality of the asset they are buying. Insurers providing this have expertise in and exposure to a wider market relating to the class in which the asset sits and therefore are able to take a view on the likelihood of the relevant risks involved.
2. Negative interest rates - driving cars backwards?
You may have heard the one about the Danish sex therapist who received a negative interest rate for a three year loan – or you may not have done. In essence, said person became a bit of a Nordic celebrity briefly as her bank effectively paid her to borrow money. The reason? Exceptional central banking measures which have manifested most prominently in Denmark and Sweden. When central banks take their main policy rates negative, seemingly strange things can happen. We are not talking about zero flooring IBOR here, we are talking about an actual negative interest rate in a standard loan document. Whether this will lead to such a scenario becoming more common, time will tell, but with central banks charging lenders to deposit cash with them, we are seeing a lot of the world being turned on its head: some large corporates are being charged for their deposits by a range of banks (not just in the Nordics either) and a few small retail banks are charging consumers for deposits. Is it time to hoard cash under the mattress and take out a large (negative interest bearing) loan?
3. Unsettled by the thought of Bitcoin settling your deals?
Bitcoin is the financial buzz word of the moment - electronic money (or cryptocurrency if you prefer) that is lauded by libertarians, allegedly used by the criminal underworld and has the glory of being not needing to be backed by a central bank. Whilst you have heard this all before, it is only the beginning of the story. Financial market boffins (including some very clever people at Nasdaq) are now looking at the public ledger (or "blockchain") technology behind cryto-currencies to replace the somewhat elderly, creaking technologies (some of which still uses paper ticketing) that currently execute financial market transactions. The theory goes that, because the blockchain public ledger used in crypto-currency is mathematically signed to prevent unauthorised meddling and is not managed centrally by any one institution, transactions can be executed instantly (very attractive in the loans and derivatives space), anonymously (not so attractive from a KYC perspective) and without the need for third parties (banks, clearing houses etc who charge fees). Every user of the ledger can consult the shared ledger and one copy is as good as another (encryption keeps everything beautifully synced). So if we can get over the (very large) hurdle of anonymity and get the regulators comfortable with the underlying technology, things may move an awful lot faster in the future….why settle at T+X days when you can settle in minutes? Think of the cost-savings and the reduction if not abolition of errors in trades…… We could even change the name away from the tarnished monikers of Bitcoin and blockchain and, as suggested by Richard Gendal of IBM go for something like "shared ledger technology".
4. Sitting on the regulatory naughty step
We are constantly hearing about the next big focus in the regulators' sights and now it appears that it is the turn of behaviour and risk management. Whilst our friends in the Basel Committee have talked about corporate governance at banks in the past and have promised recommendations on the same later this year, the issue is becoming more prominent given that barely a week passes without a large international financial institution being taken to task over historic conduct. The behaviour of banks together with their risk management policies and procedures have of themselves the potential to create systemic risks, according to Bank of England governor, Mark Carney. Heavy fines and a myriad of ongoing investigations are currently the norm but the way forward must surely involve co-operation and agreement on a global scale to prevent yet further regulatory arbitrage.
5. Ratings downgrades
With the recent ratings update published by S&P on 9 June 2015 downgrading a number of UK and German commercial banks, it is important to keep in mind the effect that such ratings downgrades can have on existing transactions involving third party banks – for example, in typical REF transactions, the borrower is required to maintain certain accounts associated with cashflow from the property. Account banks are typically required to maintain a certain rating. So what happens when account banks cease to hold the minimum ratings required of them? You may recall an article from edition 1 of View from the Riverbank on this issue – click through to read this article.
6. Cross-selling heaven…..or hell
As a law firm we do love the cross-sell. We are fantastic at banking and derivatives but we're also great at funds and regulation (amongst many, many other things)! It is interesting though to note, that in the FCA's ongoing competition probe into investment and corporate banking, they have said that one of their focuses will be on the choice, transparency and bundling of services. They have said that they want to ensure that banks offer "real choice, transparency and good service at every level" whilst making sure that the "regulatory framework encourages competition". Currently the intention is that the study is a consultative process rather than an aim of something leading to enforcement action. Looking at syndicated lending in particular, the focus will be on client choice and behaviour of syndicate banks (see last quarter's edition of View from the Riverbank for some thoughts on competition and syndicated lending more generally). A final report is expected early next year.