Some observers bemoan the lack of debt capital available to support the construction of infrastructure, yet others champion the depth of liquidity across the private sector. We examine the state of play, challenging the belief that debt capital availability is constrained.
Picture this, you have several billion Euros to invest in fixed income type products every year and are expected to deliver a return which outperforms the market. You are required to invest in relatively low risk debt instruments. You have to contend with the consequences of Central Banks weaning the markets off Quantitative Easing and the uncertainties as to which of the many muted regulatory regimes will be implemented and in what form. Lastly, you must keep a close eye on performance of your portfolio and the potential for mark to market losses. Welcome to the world of the fixed income investor. With this in mind, we surveyed fixed income investors to find out what investment strategies investors intend to deploy over the next eighteen months.
Real estate investments have always been one of the main investment categories of insurance companies, especially for life insurers. Despite the long-term nature of real estate assets, calculating their duration remains challenging. As a consequence, the policy-makers who are devising the new regulatory regime for European insurers, Solvency II, have decided to adopt very punitive capital requirements for insurance companies holding these investments. In this Market Insight, we contend that the uniform approach to all real estate assets across all jurisdictions that is adopted by Solvency II’s standard model is not justified. We derive a statistically significant duration for residential real estate in multiple European countries. Based on this, we argue that Solvency II should adopt a much more tailored and risk-appropriate approach to capital weightings for real estate investments. Such a change is important because it could re-enable insurance companies to invest in real estate, a crucial ingredient to economic recovery in Europe.
In the aftermath of the financial crisis regulators are moving ahead with the separation of the high street and investment operations of banks. Ringfencing of the retail operations of banks is an alternative to forcing complete de-mergers. Supporters of ringfencing argue that the financial system’s stability will increase whilst banks will be able to retain some of the diversification benefits offered by the existence of retail and investment franchises under the same corporate umbrella. But is ringfencing a sustainable solution? This article examines the concept of ringfencing as pioneered in the UK, issues around its implementation and whether it is likely to achieve what it is designed for.
As more details on the EU banking supervision plans emerged at the EU leaders summit last week, it is becoming clearer that the EU is banking on the ESM to finance the transition out of the Eurocrisis. Is this realistic? We believe not. In this Market Insight we put forward the risks of the current ESM set up and our ideas as to how the ESM could increase its firepower without overburdening the EU countries’ sovereign debt ratings. Structured Finance can help!
Since the beginning of the global financial crisis in 2007, many European corporates have first- hand experience of banks tightening their lending criteria, and thereby making it more difficult for corporates to access banking credit. This holds true for large corporates but especially for small, medium-sized and smaller large corporates. It is therefore no surprise that small and mid-cap enterprises say that raising debt financing is one of their two most pressing problems. Against this backdrop, we expect the European banking market to become more disintermediat- ed, as corporates will be looking to by-pass banks and tap the debt capital markets directly. Large corporates have been doing this for years and, as we argue in this paper, we expect their smaller peers to follow this example. Initiatives taken by stock exchanges across Europe to promote the issuance of corporate bonds and to make it easier for small and mid-cap corporates to access capital markets strengthen our belief.
After a tumultuous second half of 2011 in the financial markets, on the face of it, 2012 does not appear to hold much to cheer about, particularly in Europe. What will happen to the Euro? Where will the next sovereign downgrade occur? How much more equity do European banks need in order to restore confidence? There are no quick fixes to this uncertainty. However, as Benjamin Disraeli once said “there is no education like adversity”. In this Market Insight we ask what we can learn from these very volatile markets and where the bright spots might be in 2012.
Historically, sale and leaseback transactions have proven to be an effective and competitive way to finance acquisitions and to refinance companies that own real estate. In its traditional form, a company would sell its properties on an outright basis before leasing it back. In the early 2000s, companies began to move away from this traditional method in favour of the so-called OpCo-PropCo structure in which real estate would be leveraged without selling it. The financial crisis has exposed challenges in OpCo-PropCo transactions, the most important one being refinancing. In this article, we evaluate the once popular real estate monetisation technique and explore what options exist to meet the OpCo-PropCo refinancing challenge.
We all know that Structured Finance has had its own fall from grace in 2008. But now that debt investors have shifted their concerns mainly to sovereign debt whilst the credit performance of structured finance debt seems to be holding up, there is an opportunity for governments to consider applying structured finance solutions, that offer creative ways of leveraging their assets, in an effort to curb budgetary debt problems paving the way for sustained economic growth. In this article we examine the case for governments in the Eurozone to seek out sound structured finance funding as part of their debt packages.
As a result of the turmoil of the past couple of years, some asset classes have fallen out of favour, others have become more popular. Market participants are scrutinising the value of every asset class and being more selective as to where they allocate their time and capital. In this Market Insight we consider how project finance will fare as it is put under the microscope by banks and investors and the impact of Basel III on this asset class.