Alt Lending: Zombie Companies, Revitalising Banks, Covid 19 rescue Loans


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Here is our pick of the 3 most important Alt Lending news stories during the week:

1.Britain is now Europe's hub for Zombie Companies 

Corporate debt is expected to rise still further this year as firms borrow to survive in the aftermath of Covid-19.

Why it matters: Well I suppose that you have to be good at something and keeping companies alive seems the UK’s tour de force in that we now allegedly have 15 per cent of Europe’s  Zombie companies up a full 6% on the previous year with no particular reason being shared by the authors . Whether this is correct or not is another matter but it does highlight a problem that bedevils most of Europe’s major economies. Some of our largest companies are so heavily indebted that they can only just about pay the interest on their debt and are only kept alive because base interest rates are so low. This is going to be a problem in terms of post COVID recovery across the continent.  The Bank of America report  not surprisingly pointed out that the so called “zombies” had much lower levels of capital expenditure and also weakened share prices making access to equity capital more problematic. Alt lenders take note. Most debt is not perpetual and lenders will eventually expect that debt to be repaid at its maturity. Companies that can only just about pay interest have no long term way of paying back borrowings.  In fact they have little raison d’etre to be in business at all. So if you are contemplating taking on risk I would suggest that a lot of homework is carried out no matter who it is that is doing the lending.  Do we still have the people that can do this kind of painstaking but very necessary credit analysis? I sincerely hope so.

2. Banking Leaders Overhaul could reset Industry 

Some of the biggest roles in UK banking are on the table, offering an opportunity to revive the sector and rethink strategies

Why it matters: The gist of this is that a lot of the great and the good of the European banking industry are either leaving their posts or have already been replaced by new leaders.  The speculation is that these new leaders will lead to a shake up of the beleaguered banking business. I am not so sure. In particular  I think that the sectors USP which used to be its ability to understand risk and price it properly has melted away.  They are all Investment Banks now and Distribution channels and opaque derivatives are what is left behind. This ought to focus minds but for the purposes of Alt Lending it is difficult to see what else the bones of the lending systems are going to be able to do with interest rates at zero or below. What paradoxically might be the answer is the renaissance of the old merchant banking structures where projects could be financed rather than companies and returns could be tailored to risk. I know of people who are now working in the field of digital and real time risk management over the whole field of component based project finance from prospectus to implementation, ongoing management, to liquidity and trading crucially including real time data. Surely this is better than dealing with the undead?

3. Incumbent Banks Block Alternative Lender Access to BofE's Term Funding Scheme

The move comes as a fresh blow for fintechs who have struggled to access funding to provide SMEs with government-backed loans.

Why it matters: While I have some sympathy with the alternative lenders who have been trying to get a share of the action from Rishi Sunak’s magic money tree, I cannot help but feel that this is a non story. The real issue here would appear to be whether Bank of England funding to the Alternative Lending sector at returns of 2.5% gross would yield sufficient returns on a net basis for equity investors to dip their toe in the water. These loans after all are not meant to generate revenues to lenders, they are there as a support mechanism to borrowers laid low by COVID 19. Oliver Prill CEO of Tide was right when he said that subsidised credits from the Bank of England were the only way that Alt Lenders could exploit this market. Undoubtedly these lenders have a far swifter and efficient response mechanism than our lumbering clearing banks can provide which should lower administration costs per case but as far as scalability is concerned the picture gets a lot muddier. Government sponsored schemes are not known for their simplicity and ease of administration. I do not know the detail of these schemes but I do know that the devil will be in the detail particularly when something goes wrong. Better leave well alone.

Howard Tolman is a well-known banker, technologist and entrepreneur in London,

We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.

For context on Alt Lending please read the Interview with Howard Tolman about the future of Alt Lending and read articles tagged Alt Lending in our archives. 

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