For 160 years, UK banks held a close relationship with Tate & Lyle, helping finance its expansion from a single sugar refinery in Liverpool to one of the world's largest suppliers of sweeteners and food additives. But when the company came to renew its revolving credit facilities - essentially an overdraft - earlier this year, the outcome left a bitter taste for many of what had until then been its closest banks.
Not a single UK bank made it onto the US$800m deal. Barclays, RBS and Lloyds, which for years had formed part of the close-knit group of banks that provided Tate & Lyle with a low-cost RCF on the understanding that it would reward them with lucrative ancillary work, were no longer there. Picking up their spots were rival banks from the US, Japan, Germany and China.
It's a pattern that's been repeated time and again over the past couple of years. UK banks have lost dozens of prized positions as providers of RCFs to core domestic clients. In recent months, companies such as Jaguar Land Rover, JD Wetherspoon and Dixons Carphone have signed new facilities without some - or all - of their traditional UK relationship banks.
In a sign of the shift, three of the top six providers of RCFs - when measured by number of facilities - to UK corporates in the year to date are foreign banks: BNP Paribas is second in the league table, Citigroup fifth and Bank of America Merrill Lynch sixth. Traditionally, the UK banks have locked out the top spots. All three banks have been steadily climbing up the league tables over the past few years.
PRESSURE ON RETURNS
One driver is simply that UK banks, like their global peers, are becoming much more ruthless about how they employ their balance sheet. More onerous capital rules brought in after the financial crisis and the resulting collapse in return-on-equity has made it more difficult for banks to justify extending RCFs, many of which have traditionally made little - or no - money on a standalone basis.
In some cases, UK banks are withdrawing from RCFs to focus on more profitable business. The trend is forcing many corporates to look not just at funding from foreign banks but for alternative sources of capital. An increasing number are turning to private capital providers - mainly investment arms of US insurers - which don't have the same capital requirements as banks and so can make a decent return by lending money to UK corporates.
"Banks have certainly become more selective over where they deploy balance sheet - there's been a constant churn of clients," said Akshay Shah, head of the London office at New York Life Investors, one such capital provider. "It's left us in a pretty good position. What we are offering is absolutely pari passu with banks loans - our product isn't really any different."
Private capital providers have seen a big pick-up in issuance from UK companies over the past few years, with volumes roughly doubling since 2015. Companies including Thames Water, BUUK Infrastructure and even Tottenham Hotspur Football Club have all borrowed money in the private placement bond market over recent months.
"If banks are retreating from the market, for whatever strategic reason that might be, we should be able to see the benefits of that," said Shah. "It's no different from what happened in the US banking system a few decades ago: capital is expensive, and for many clients - even if their credits are strong - the pricing just doesn't work. Loans are a loss-leader for many banks in the UK."
OPPORTUNITY KNOCKS
But while new capital rules have led some banks to cut back on lending, others are taking the opposite approach. BNP Paribas and Citigroup have both launched a big push in the UK over the past two years, expanding their corporate banking offerings to target mid-sized companies. Lending is at the heart of the strategy. Both were on the Tate & Lyle RCF.
The two banks see UK clients as potentially very lucrative - not from the RCFs that are often considered a show of a bank's dedication to a client, but from additional business that comes from such mandates: in bond offerings, mergers and acquisitions, trade finance, derivatives and transactional banking. RCFs are increasingly seen as a way into the UK market.
"Pre-crisis, there was more focus on revenue growth and less discipline when it came to return on capital," said Oliver Rey-Beckstrom, head of middle market and corporate finance for EMEA at Citigroup. "As a result, banks were sometimes happy to just be a lender and not do much ancillary business. But nowadays there's a lot more focus on cross-selling other services."
Global universal banks such as BNP Paribas and Citigroup believe they are in a better position to monetise low-return or unprofitable RCF business. Unlike UK banks, many of which have dramatically scaled back - both geographically and in terms of products - since the crisis, they still have a full suite of businesses that they can cross-sell to UK clients.
For UK banks, the maths often doesn't work. RBS and Lloyds, having been bailed out, have shuttered much of their investment banks. Even Barclays has pulled back significantly since the crisis. "We have seen certain situations where banks have dropped out of financings because they didn't think they were in a position to win ancillary business," said Rey-Beckstrom.
BEHIND THE FENCE
Other factors are at work. Ringfencing regulations that kicked in at the start of the year are once again forcing UK banks to take a long, hard look at how their balance sheets are being used. New rules have in some cases led to some corporate clients - especially mid-sized ones - being shifted to different reporting lines at banks, forcing them to re-examine those relationships.
"The regulatory issues that the banks are going through have provided a catalyst to actually enact something which they have been conjecturing for a long time – that they need to make their lending activity stand-alone profitable rather than relying on fee income from other areas and cross-subsidising," said Ed Barker, a vice president at Pricoa, which is now one of the biggest bilateral lenders to UK companies.
"Whereas previously there almost felt a need among the big high street banks to be in every loan facility, or at least to have a significant market share, now they are taking a much more economic view of their lending activities and dropping some clients. They are taking decision to reduce or cut lines because they are not profitable."