BUSINESS FINANCING
THE RISE IN PROMINENCE OF ALTERNATIVE LENDERS
Much has been said and written about alternative lending providers in Northern Ireland over recent months. Those businesses with a more traditional outlook will normally seek finance from their bank, whereas others are actively seeking to tap into the rise of alternative lending in Northern Ireland. Arthur Cox has been at the forefront of legal developments in the finance sector in Northern Ireland for 20 years, with Finance Partners Kieran McGarrigle and Stuart Mansfield providing expert advice on a wide range of banking, restructuring and financial regulatory issues. Below, Kieran discusses the role of the alternative lender in Northern Ireland.
Deleveraging Some banks in Northern Ireland have been deleveraging distressed loans and the assets which secured distressed loans since 2012. This process is moving towards a conclusion, with one more significant portfolio to be brought to market in 2017.
Local banks which embarked upon deleveraging from 2012 will say that their balance sheet has significantly improved as a consequence of this strategy, whereas those banks not involved in deleveraging will say that their balance sheet has always been sound, meaning they did not need to embark upon a wholesale disposal of loans.
All banks, whether they have deleveraged or not, will now say that they are ready, and willing, to lend and that they are open for new business.
Emergence
Banks in Northern Ireland have been faced with a challenging few years. The property crash in 2008 has undoubtedly forced banks to look more carefully at how their capital is utilised when lending but this, whilst prudent and necessary, has allowed a number of alternative lenders to emerge to provide finance to businesses in Northern Ireland which could not, for a variety of reasons, get the same( or better) financing terms with a local bank.
The challenges for banks are not over yet and their regulator, the Prudential Regulation Authority, now requires banks to separate, or ringfence, certain core banking services critical to individuals and small and mediumsized enterprises from wholesale and investment banking services.
This is a significant reform with which Arthur Cox is assisting a number of banks in Northern Ireland.
Regulation
Alternative lenders generally escape the rigorous regulations imposed on banks because they do not provide banking services such as current accounts, overdrafts, residential mortgages and consumer loans.
Alternative lenders, generally, focus on commercial loans to businesses which are not normally as heavily regulated and are funded generally by private investors.
This has allowed a number of nonbank lenders to emerge and gain market share in Northern Ireland as the banks continue to regroup after the property crash and deal with the changing regulatory landscape.
An increase in alternative lending As is the case with most things in life, there is a myth and a reality when it comes to alternative lending.
The myth is that alternative lenders will become a dominant force in Northern Ireland and will eventually replace banks. However, the reality is that the role of the alternative lender will be determined by the constraints, both regulatory and commercial, on what transactions banks can( or cannot) finance.
At present, we are seeing alternative lenders predominantly featuring in real estate financings and assetbased lending( ie invoice discounting).
Assetbased lenders are not new to Northern Ireland and will continue, as they have always done, to compete with banks to provide cashflow solutions for businesses where they take title to, or security over, realisable assets.
However, there has been a significant increase in the number of new real estate finance providers in Northern Ireland and we expect this to increase further over the next two years.
Real estate transactions
As some banks deleveraged distressed loans, the selling bank would exit the relationship, but this did not mean that the loan was no longer distressed; it meant that the identity of the“ lender” had changed.
The borrower still had a loan to repay which was generally greater( and in some
“ The challenges for banks are not over yet and their regulator, the Prudential Regulation Authority, now requires banks to separate, or ring-fence, certain core banking services critical to individuals and small and medium-sized enterprises from wholesale and investment banking services. This is a significant reform with which Arthur Cox is assisting a number of banks in Northern Ireland.”
18 www. businessfirstonline. co. uk