I don’t know about you, but I am a little tired of reading press releases from banks extolling their new credit lines to SMEs.
Mostly, these are not new credit lines. Banks are simply stretching existing credit, taking an increased margin and a hefty arrangement fee in return for their largesse.
This enables the banks to publicise their vigour but, in reality, like grotesque celebrities pumping themselves with collagen and botox to maintain a youthful appearance, does little to fool the public or arrest their underlying decline.
Banks are in a pickle. Wrinkle-free lines of new credit will remain a marketing sleight of hand until their capital bases are rejuvenated. To rebuild, the non-performing loan books need to be cleared out. Yet accelerating the repayment of defaulting credit will erode the capital bases even further. The problem is particularly acute in sectors where systemic supply chain risk exists for those short-sighted banks who lent with their right hand unaware that their left hand was lending to the key customer or supplier of the borrower from the right. Meanwhile, enticing savers to invest their life savings with banks will remain challenging with interest rates at an historic low.
So where should savers go to save and where should SMEs go to obtain new credit?
For some time there was nowhere. However, a bond market is emerging which matches these income hungry investors with capital starved SMEs tired of waiting for the banks’ convalescence to end. This is not just the public bond market, which is still the preserve of large hairy corporates and sophisticated institutional investors, but also the private placement bond market. The products in this market allow individuals to invest directly in a SME through an instrument which is structured to give reasonable fixed returns greater than those available through a normal bank savings account, over a fixed period.
Inevitably, the potential risk of investing in such bonds as opposed to the supposedly safe-haven of a bank savings account needs to be assessed on a case by case basis, but then again, who can say whether the government will keep a bank’s life-support machine running the next time a crisis arises?
Perhaps the real reward for investors in a bond issued by a SME is the satisfaction of knowing that they are not only cutting out the middle men, the disgraced banks who got us into this mess in the first place, but they are also directly fuelling the British economy, injecting a spring into its step once more.
At Marriott Harrison LLP, we are pleased to have helped one such SME issue its first private placement bond. We think there will be many more.