Sometimes, context is everything. A century ago, having spent four years consumed by conflict, Europe was about to enter a period of political and economic turbulence on a scale that is scarcely imaginable today.
In the UK, the ratio of government debt to GDP breached 100% in 1916, and would not fall back below this level until the 1960s. High unemployment lasted until the outbreak of the Second World War, peaking at 15%. Across the continent, trade dried up as politicians focussed on protectionist measures rather than re-engaging with the export markets that had been choked off during the war. In 1914, international flows of labour, good and capital had hit all-time highs. They would not return to the same levels until the late 1990s.
Now and then
While the UK’s imminent departure from the EU creates uncertainty, the post-war figures should help to put our present situation into perspective. The UKs unemployment rate stands at 4% – its lowest since 1975 – and the debt to GDP ratio is at 85.6%. Concerns around future trade arrangements are understandable, but despite some (almost entirely unjustified) hysteria about access to medicine, there is no serious risk of loss of life.
Nevertheless, concern about how to navigate through the uncertain political and economic times ahead is a constant theme for our clients – whether real estate, social housing, project finance, private equity, or corporates. Memories of challenging funding markets before and after the 2008 crisis are still fresh, and many are keen to ensure they are in good shape ahead of Brexit and the transition period that will follow. Others, particularly landlords, retailers, restaurant and bar operators, are apprehensive about consumer spending. With higher non-GBP input prices, the risk of further GBP weakness in the event of a “no deal” scenario and a growing number of retailers and leisure operators going into administration, such concerns are entirely appropriate.
Investor appetite remains buoyant
To date, we have not seen any slowdown in lending activity by banks or credit funds, and investor appetite in capital markets remains buoyant for quality UK borrowers. As a result, several of our clients have been able to extend their existing facilities by two or three years, in effect reinstating five year facilities mid-period to take them past the point where the transition period is likely to have ended. Generally, lenders are keen to do this – particularly if there is an opportunity to adjust fees and margins.
Hedging interest rates
Almost as important as securing funding is ensuring that the associated interest cost is appropriately hedged. Given the level of uncertainty around the Brexit outcome, not to mention the economic impact this will have, it is no surprise that borrowers are increasingly looking to more flexible structures such as caps and swaptions. While the cost of these products has increased markedly in recent months, the old traders’ adage that “when options are expensive they are probably not expensive enough” is worth bearing in mind.
We continue to work with our clients and their hedge counterparties to ensure they are appropriately financed, and that their hedging arrangements provide adequate flexibility to react to shocks – both in the markets and in the broader economic landscape.
It might be fashionable to compare today’s geopolitics to those of a century ago, but we shouldn’t carry this temptation too far. No matter what arrangements the UK comes to with the EU by 29 March 2019, and important though they are, the treaties signed over the next few years will – thank goodness – never loom as large as those signed after 1918.
For more information, please contact Sam Bett, Director at JCRA, at Sam.Bett@jcrauk.com.