New debt market entrants “less safe” say borrowers

Debt funds seen as more innovative and quicker in executing

New entrants to the debt market are considered to be “less safe” for UK borrowers’ businesses according to research by a bank – Lloyds Banking Group.

Lloyds logo CROPPEDThe bank surveyed its customers as part of its bi-annual Commercial Property Confidence Monitor and found that only 23% of major businesses considered entrants to the real estate financing market to be “safe for my business” whereas all majors considered traditional banks to be reliable.

In recent years the lending market has become steadily more diversified as institutional investors and funds have become active and banks, in part, retreated after the global financial crisis.

John Feeney, global head of commercial real estate at Lloyds told Real Estate Capital that although debt funds are sometimes going head-to-head, usually they were working with banks.

“At times we are competing with debt funds, particularly in higher leverage situations in London but there are not that many situations and we usually see them as constructive market participants where we are underwriting risk and passing it on to a fund,” he said.

Fund managers were most trusting of new entrants to the lending market, with 66% viewing them as safe, although they still considered traditional banks to be a more reliable set of hands with 84% seeing them as “safe for my business”.

New entrants were however considered to be more innovative and flexible. Of medium and large sized businesses based in London, 73% viewed them as open to risk compared to only 9% considering traditional banks being open to risk.

The speed at which deals were executed by new entrants compared to traditional banks were also considered to be in stark contrast. Only 42% of fund managers considered traditional banks to deliver fast service and as few as 27% in the North West of England considered them to be so. Contrastingly, 72% of fund managers thought new entrants delivered fast service, as did London-based borrowers.

In all regions, sectors and sizes of businesses traditional banks were considered to be “best for business like mine” over new entrants.

“In regional markets debt funds hardly have a presence. Some mezzanine providers look at opportunities but they are just plugging holes. You have to search hard for good quality opportunities in the regions and they are generally much smaller than in London so the debt funds find it difficult to get scale without large teams – the regions are never going to be a particularly fertile hunting ground for them,” Feeney claimed.