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Capital markets: Quarterly trends update – 2021 – Q1

22 February 2021

Cliff Pearce

Global Head of Capital Markets, Group

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Cliff Pearce

Global Head of Capital Markets, Group

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Welcome to our first quarterly trends update for 2021. Read on for incisive and topical insights from our capital markets team.

In this issue, read how the new US administration is set to impact the ABS market; why Hong Kong’s reinsurance market is set to take off; and our expert predictions for the coming months.

This quarter’s top stories

Read on for our top three trends affecting capital markets around the world…

Biden government to drive change across ABS market

As the US welcomes its new president Joe Biden, the new administration is expected to bring some enhanced regulations into play – prompting some analysts to predict a 13% increase in new ABS, RMBS, CMBS and CLOs before these regulations take effect.

Many eyes will be on his nominee to head the Securities and Exchange Commission (SEC), Gary Gensler. One area set to come under greater scrutiny is rating agencies, in an effort to put a stop to so-called “rating shopping”. We should expect to see newly-focused control in this regard – looping in the enforcement division as needed.

And the other core area where we expect change – of course – is environmental, social and corporate governance (ESG). The new Biden government intends to establish a new regulatory framework for socially responsible investments – offering some clarity on what is currently regarded as a somewhat ‘loose’ set of rules. As such, it’s likely that more and more investors will be adding ESG to their portfolios – significantly outpacing high-yield, emerging market and investment-grade corporate bonds. We at Intertrust Group will be watching the US market very closely as these new initiatives come into effect.

Real estate refinancing to gather pace as payment holidays end

On the 31 March, the UK government’s moratorium on forfeiture of commercial leases for non-payment of rent and other amounts payable under lease contracts is due to expire. This was outlined in the Coronavirus Act 2020.

So, in the coming months, stakeholders will need to demonstrate a cohesive and flexible approach for new and existing real estate transactions. Many may have agreed to transaction-specific holiday periods or even contemplated lower annual property asset valuations. It’s likely that covenants will be breached and certain sectors will be impacted more than others – the obvious being retail. But there are beacons of light.

At Intertrust Group we are seeing capital flows increasing from Asian investors into pockets of the UK and European real estate market; non-bank lenders, for example, have looked to support UK mortgage markets and there is even interest in forestry and agriculture. Clearly, for them, the negative sentiment in these regions is possibly ‘overdone’.

Further, the jury’s still out on how the pandemic will affect the commercial and residential sectors. The ‘working from home’ trend may be grinding to a halt as Zoom fatigue prevails – many are extremely keen to return to a physical workplace and see colleagues face-to-face again. And while some expected to see more people buying homes further from larger cities, there’s no doubt that the city lifestyle is still a draw. We’re not out of the woods yet – and we’ll need to keep an eye on how these trends pan out.

Hong Kong set to become a prime hub for growing reinsurance market

The Hong Kong Government has recently announced that the detailed regulatory framework for insurance-linked securities (ILS) will go live towards the end of March 2021. This will include a suite of subsidiary legislation, allowing the setup of special purpose insurers (SPIs) to acquire specified insurance risks from a ceding insurer or reinsurer, which are then syndicated to the capital markets via the issuance of by these SPIs – such as catastrophe bonds – to eligible institutional investors to fund the acquisition of such risks.

The reinsurance market is set to grow from US$400bn in 2020 to US$555bn in 2025, with Asia Pacific comprising 28% of the global reinsurance market. This is fueled by the growth of China’s insurance market, which is set to become the world’s largest by the close of this decade. With these reforms, Hong Kong is primed to become an ILS hub for the Greater Bay Area (GBA) in China.

Furthermore, global ILS issuances are set to grow to US$12bn in 2021, which means Hong Kong will do well to take advantage of this alternative asset class. Intertrust Group is a leading and pioneering participant of the ILS market in Asia, having supported the first SPRV as Shares Trustee in its ILS issuance under the Singapore framework and subsequent issuances by other SPRVs since then. With our deep global capital markets expertise, we are able to support ILS stakeholders in Hong Kong by providing SPI incorporation, company secretarial, accounting, directorship and trustee solutions.

Market round up

Also in the news this quarter…

Streamlining operations

A new year often comes with new resolutions – and for many, this means being savvier with their spending. Following months of global uncertainty, our colleagues have noticed a distinct shift in our clients’ activity towards reducing costs – without wanting to compromise the quality of their service. In our digital age, we’re already finding ways to cost-effectively streamline processes that used to be laborious or mundane. But as the world embraces a new era of work, keeping costs low is sure to be even higher on the agenda – and here, creativity will also be key to staying ahead of the curve.

Sovereign debt highs

As people around the world got to grips with the Covid-19 pandemic, sovereign debt levels rose to record highs. This surge in borrowing levels came against a backdrop of falling GDP, as governments offered furlough and bail-out schemes to keep local economies afloat. The challenges of Covid-19 haven’t disappeared, but we expect these borrowing levels to shrink across 2021 – and anticipate high levels of restructuring and refinancing over the next three years. The G20’s Debt Service Suspension Initiative will be influential here. We have actively provided services to support various countries and governments; in the UK, we provide professional services for the Covid Business Interruption Loan Scheme (CBILS) for our SME lending and wider client base.

ESG prevails

Many were surprised in 2020 when lockdowns around the world led to clearer skies, cleaner oceans and rivers, and even increased sightings of endangered animals. This of course didn’t detract from the immense challenges we all faced – and continue to face – but it did highlight the huge impact we have on our environment. Now that vaccination programmes are in full flow around the world, capital markets will be an important tool in rebooting the global economy – and it’s clear that ESG investments will be key. Businesses now need to embed this philosophy into their corporate psyche and culture, as ESG reporting standards become more established. As a major provider of capital markets services, Intertrust Group is ready to partner with issuers and investors on the agenda for change.

Looking ahead

We’ll be keeping an eye on these trends over the coming months…

  • ESG will stay on the top of the agenda… although the lack of standardisation within the financial services and banking industry will be a hindrance to progress. We can expect to see this addressed although we expect this to be a process of evolution not revolution as all counterparties come to grips with what it means to be ESG compliant, how best to effect that and then be duly accredited. An awaited EU Green Bond standard would certainly pave the way for this.
  • Risk-free rates will take up focus… Whilst the adoption of the rates for new transactions may well already be well underway, repapering legacy transactions will be taking up more bandwidth as many counterparties are hesitating to see what market standards are adopted before adopting them themselves. With the clock ticking down to IBOR’s demise, this strategy could divert attention later in the year as issuers rush to implement the necessary changes. However, in the more complex Structured Finance markets and particular the ABS sector, there are many stakeholders that need to be involved and not least investor consent required, which in turn will require a much greater focus potentially leading to a rush to complete the task.
  • Regulation will also continue to dominate… The European Commission continues to amend the Markets in Financial Instruments Directive (MiFID) and continuing attention being given to the securitisation market particularly around the STS Framework. Greater transparency in this market is a key theme coming from the Capital Markets Recovery Package legislation and no doubt we will see this evolve further during the year.
  • Outsourcing will continue to gain in popularity… The limitations imposed on businesses during the pandemic exposed vulnerabilities and risks that perhaps previously weren’t so obvious. Many managers embraced outsourced services, in order to implement the robust operational processes that they needed to survive. We expect this trend to continue across 2021, especially as businesses start to bolster their capabilities across technology and data management
  • And new UK policies will emerge… impacting the financial services industry as it diverges from the previously adopted EU standards. We can expect to see measures in several different areas as the UK seeks to differentiate itself from Europe and maintain its competitiveness, as already laid out in the Future Regulatory Framework Review consultation paper published in October last year. At the core of this will be strengthening the existing regulatory regime determined by the Financial Services and Markets Act.

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