Traditional lending at odds with emerging capital in UK
Traditional lending at odds with emerging capital in UK
06 NOVEMBER 2018 9:15 AM

A raft of challenger banks are competing with traditional lending sources for the few deals presenting themselves in the U.K. Could this be a recipe for a recession? Not if lenders have understood the lessons of the past and have strict criteria in place.

MANCHESTER, England—Lending in the United Kingdom has become a mad scramble of liquidity and players, with everyone, everything and every capital platform analyzing the same deals.

Space can be found when some of the searchers drop off as specific deals do not fulfill their lending criteria, said panelists during a session at the recent Annual Hotel Conference titled “Don’t bank on it: Is it time to ditch traditional financing methods?”

“There definitely is an increase in challenger banks, although I am not necessarily coming up against them for every hotel opportunity,” said Emma Young, head of hotel finance corporate banking at Allied Irish Bank (Great Britain).

Challenger banks are generally deemed to be banks that have only a digital presence and not a physical one on High Street.

“There are only six non-challenger banks, but we view ourselves as a challenger bank,” said Shona Pushpaharan, head of hotel and real estate finance at Clydesdale Bank. “We target specific areas of the (small and medium enterprise) market, including hotels. It’s not about competing but ensuring any deal ticks off our criteria.”

Ben Barbanel, head of debt finance at OakNorth Bank, said that despite there being “huge amounts of liquidity,” his company has an advantage by being relatively new.

“We do not have 300 years of legacy that dictates how we structure transactions,” he said.

Young said she also comes up “against institutional, pension and insurance” players, which she sees “not so much as competitors, just as alternative capital sources.”

“Where we see direct competition is against debt funds looking at the freehold London market,” she added.

Bob Silk, relationship director of the hospitality and leisure team at Barclays Bank, is more specific as to whom and what he sees too often at the marketplace.

“Who have I been up against recently? (Royal Bank of Scotland) twice, where we won; Santander, and we lost badly; against the Bank of China, but if you pay 15 times (earnings before interest, tax, depreciation and amortization) you are welcome to it,” he said.

Silk said he also has seen heady prices for restaurants, too.

“I have seen six times EBITDA in restaurants. I always say ‘too many sweets, you will bust your teeth; too much debt, you will bust your business,’” he said. “In any deal, there is no one single competitor. It is all over the place, a huge amount of liquidity.”

Young said one thing that sets her bank apart is a “focus on the sustainability of cash flow,” not so much loan-to-value.

Barbanel said loan-to-value should not be looked at in insolation but as a key measure in certain markets. He added the more flexible a lender can be, the more deals it will probably secure.

“The biggest differentiator in my career is openness and transparency in bringing our clients into our credit process, directly into our credit committee. Clients like to meet the real decision-makers,” he said. “There is no substitute to eyeballing someone. Fleet-of-foot works, too, but if you come in off the street wanting £10 million ($13 million) in a week that will not happen in these compliance-rich times.”

Young said back-of-office and credit teams also have to be aligned.

Getting feet dirty
Pushpaharan’s Clydesdale Bank and Young’s Allied Irish Bank are both actively looking at development finance, they said.

“We have done that over the last four years when few others were and liquidity was tight. … We like risk as we get return on that,” Pushpaharan said. “We understand it and we like building hotels, as long as you take a project view of a development. We go to every monthly development site meeting. Eight percent of what we still do is development finance, but it is getting more competitive.”

Development lending need not always be risky, panelists said.

“Who has built an extension on their house? Was it on time? Was it on budget? It always goes wrong?” Silk said.

Young said each deal lives or dies on its merits.

“We know the parameters of a sector, and we will be quick with a ‘no,’” she said. “We have a credit committee that sits three times a week, and if they needed to sit for a fourth time, they will.”

Another differentiator is deliverability, Pushpaharan said.

“We will not be the first through the door like Barclays or RBS, but within a week we can have the pricing locked, as well as first-stage credit support, which allows us to show (the debt has) been endorsed by our credit committee,” she said.

There will be few people across the whole process who will choose to keep silent, panelists said, so the necessary conversations are possible, but must be done quickly.

“People want to talk about their business. Actually, that’s all they want to talk about,” Barbanel said.

But sight of the end goal is not lost in all of the talk, Silk said.

“We’ve had spirited conversations with our credit committee, but if agreed, we will deliver,” he said.

Dispelling recessionary myths
Because they were bitten once, banks are now twice shy, panelists said, referring to the Great Recession.

“We are very collegiate. Our lending appetite is more subtle, with fewer spikes, and if I lend you money … we will stick with you through thick and thin,” Silk said.

Pushpaharan said much has changed since the recession.

“I hope we are in a slightly different market now. We lend with sufficient covenant headroom, as where we are in the cycle we have to be responsible lenders, despite the competition,” she said.

Young said lending is smarter, too.

“We (today) apply the assumptions and sensitivities learned from the last recession, so we are confident any cycle will be weathered,” she said. “Lending has become more relationship-driven.”

One worry panelists expressed is that people and entities might forget the lessons learned the hard way during the recession.

“Where money is concerned, people are greedy and have very short-term memories,” Silk said.

But Young said she believes borrowers understand the dangers, and sensibility can win out, despite there “being some eye-watering terms.”

“It not all about leverage,” she said, adding in jest that “there are some borrowers who want to repay.”

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