Asset managers are making inroads into the corporate lending market. Banks once looked on these “direct lenders” as rivals. But working with funds can help banks manage refinancing risks, and retain clients as they deleverage.
Asset managers have long had expertise in analysing the credit risk of large firms that tap public or private debt markets. But increasingly, firms like M&G, Amundi, Axa and BlueBay are lending directly to smaller companies.
Competing directly with traditional banks, which benefit from implicit government guarantees and branch networks, sounds risky. Yet successive financial crises have left lenders needing to deleverage. RBS estimates banks have cut 308 billion euros of loans since 2012.
Direct lending also means different things to different firms. Some, like M&G and Amundi, are making senior-ranking loans to ordinary companies. Others target firms in distress or being bought out, and can provide lower-ranking debt or even equity. The yields can be anywhere from 6 or less percentage points over interbank rates to private-equity style double-digit returns.
Banks and asset managers should be able to live side by side. Unlike banks, direct lenders do not need to meet liquidity or capital requirements, and so can competitively provide long-term funds, or take riskier slices of loans. By joining forces, banks can keep clients, but not tie up their balance sheet or capital. There remains a risk that direct lenders end up looking like shadow banks, but at the moment they aren’t dabbling in maturity transformation or cranking up leverage. By unbundling credit risk from cross-selling subsidies, they should make loan pricing more transparent.
Yet the relationship needs to be carefully monitored. The two could find themselves at loggerheads if a default occurs, particularly if one is subordinated to another. Being too close can be risky. Banks might use the new lenders as a dumping ground for their worst assets, as they did with collateralised debt obligations.
Hence the interface between banks and non-banks could create sparks. Still, regulators like Bank of England Governor Mark Carney are beginning to treat non-banks as part of the solution to global banking woes, rather than as a problem to be feared. Provided regulators – and asset managers – stay vigilant, direct lending has a big future.