Investor confidence returns to the specialist lending market

Monday's news of the impending £400m IPO of Charter Court Financial Services, a specialist mortgage lender backed by Elliott Management, is the latest in a series of indicators that investor confidence in the UK specialist lending sector is returning as the short-term impact of Brexit on the property market fades.

Whilst a 'rumoured' IPO may seem tenuous evidence we must remember that six months ago in the immediate aftermath of Brexit, and hot on the heels of both the mortgage credit directive implementation and a further round of buy-to-let tax increases the idea of any specialist property lending business coming to the public markets would have been implausible.

In the M&A market, H2 2016 saw a number of high-profile deals in the specialist lending market successfully complete, as well as significant new bank funding lines committed to support both M&A and growth in lending.

Equity market sentiment recovering

Quoted challenger banks have also enjoyed a resurgence of investor interest following their dramatic sell-off post-referendum.

Of the four newly-minted challenger banks three are now trading meaningfully above their pre-referendum levels.  The one laggard is Shawbrook whose valuation has been impacted by well-publicised specific issues in its asset finance business.

M&A activity recovering

After a faltering start to 2016, M&A in the specialist lending market showed signs of recovery in the second half of 2016 with the buyout of ENRA Group, a leading provider of bridging and second-charge mortgages, by Exponent and the recapitalisation of Together seeing management take full ownership from Equistone.

Post-Brexit we saw that articulating a credible strategy for organic growth independent of the market was essential to successful M&A in an environment of greater political and economic uncertainty. Given their relative advantage in underwriting certain parts of the specialist market, these conditions favour non-bank lenders and we would expect to see more M&A amongst them over the coming year.

Supportive debt markets driving activity

Together Group's recapitalisation in October '16 was testament to strong support from the capital markets for specialist lenders, with £220m of high yield bonds placed to facilitate the transaction. Supportive debt markets continued with an attractive banking package provided by Intermediate Capital Group in November '16 for the acquisition of ENRA Group, and a further £90m of funding committed to Together by Goldman Sachs in January '17.

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