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In the same spirit of ‘Timehop’, a time capsule of your online presence, our annual review gives us the opportunity to showcase a montage of 2015 – to remind ourselves of the themes which dominated and the solutions we found for our clients - and to look forward at themes that we will keep on our radar in 2016 so we can continue to provide high-quality financial risk advice to clients.
In reflecting on our own musings, documented on our website, the most used 2015 phrases were China, UK election, Fed rate rise, USD strength and falling oil prices. In 2016, replace ‘UK election’ with ‘US election’ and we expect a continuation of the same.
Most of our hedging mandates in 2015 revolved around these key themes. We continued to see the expansion of credit. The ‘will they, won’t they’ debate around Fed tightening dominated and certainly influenced the number of interest rate hedging mandates for us. The desire to put capital to work created the opportunity for us to advise on one of the largest deal-contingent interest rate swaps completed in the US market.
In UK Real Estate, we completed £1.5 billion of ground rent transactions and proudly published our A Review of Interest Rate Hedging in Real Estate paper. Other Real Estate sectors such as Healthcare and Student Accommodation are still emerging in many European markets and offer higher yielding opportunities. We have seen many new mandates in these ‘operating assets’. In the US market, the multi-family and hospitality sectors were extremely active, leading to record deal flow. Combined, these are among the largest institutional Real Estate sectors in the US.
Private Equity was in exit mode – meaning new fundraising is underway. There is a mountain of ‘dry powder’ in both equity and private debt funds, but double digit multiples are stifling deal flow.
Consumer related transactions (travel, restaurants, retail) were in vogue and we were fortunate enough to work on a large number of them. In addition, many mandates stemmed from add-on M&A activity as private equity funds augmented growth across existing investments.
The most active area within project finance and infrastructure was Public Private Partnerships. Canada led the way with record volume of bond issuance and the Netherlands was also very active. The downward movement in credit spreads provided opportunities to refinance projects globally, although out-of-the money swaps did create challenges in certain cases. This refinancing trend is expected to continue in 2016. Finally, the expansion of credit led to our highest number of asset/liability hedges and acquisition financing opportunities in the US.
For JCRA, 2015 was a momentous year, with growth surpassing expectations. We worked with clients on transactions hedging close to €30 billion of exposures in Europe and $25bn in North America. We continued to build on our global footprint with the opening of our San Francisco and Toronto offices to better serve both existing and new clients.
Looking forward to 2016
While low, or even negative, interest rates led our clients to take a sanguine view of this risk in Europe, the management of foreign exchange risk was a major theme globally. With returns across all asset classes likely to be under more pressure in 2016, unmanaged currency is a source of uncompensated volatility and is attracting the attention of investors/shareholders more than in the pasLooking forward, the extension of renewable energy tax incentives along with the emergence of the Clean Power Plan will hopefully provide some clarity around the US energy plan. These initiatives, along with the market’s readjustment to new energy prices, will shape the NorthAmerican project finance market for years to come. In a similar vein, Contract for Difference (CfD) in the UK may encourage more interest in renewable projects in the domestic market. More broadly, we will all be watching out for the impact of the UK referendum on EU membership (2016/2017) and the US election results to see if these trigger policy and regulatory changes that effect the markets and sectors we operate in.
From an accounting perspective, changes in the standards and the regulatory environment are still a common talking point amongst clients. The Dodd-Frank Act and EMIR both imposed requirements on derivatives counterparties; even now it leads to delays in execution.
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