Staying Fixed in Times of VUCA

With Spain’s SMEs struggling under the weight of COVID-19, MARF provides an excellent gateway for them to obtain funding through non-traditional means. At the same time, investors are also scoping out new sources of returns making MARF a very attractive investment destination.

Since March 2020, COVID-19 has had a paralysing effect on the global economy, and Spain is no exception. While the International Monetary Fund (IMF) is forecasting a 3.5% drop in global GDP (gross domestic product) the Euro-area is projected to see a contraction in GDP of approximately 7.2%. Meanwhile, the IMF has warned that Spain could see a double digit decline in GDP totalling around 11.1%. The sheer scale of the crisis has ushered in unprecedented central bank intervention, which in turn is suppressing interest rates to either zero, or even negative territory in some countries. For instance, spreads on Spanish debt reached 0.55 bps in January 2021, the lowest they have been since before the eurozone debt crisis. Despite these dynamics, the financial market infrastructure (FMI) and trading venues in Spain weathered the volatility, and were able to handle the increases in flows and volumes. 

In contrast to the US and Asia-Pacific, European companies historically remain heavily dependent on bank financing. Whereas non-bank funding accounts for 73% of corporate financing in the US, it comprises just 24% in Europe. In Spain, I estimate that funding ratio to be in the region of 90% for banks and 10% for capital markets. This is something which MARF is aimed at urgently resolving. After the financial crisis of 2008 and then again in 2010-2012, the BME was mandated by the Spanish government to develop a new market to support the financing of SMEs via the debt capital markets. By making it easier and cheaper for SMEs to list fixed income securities, the MARF is hoping to reduce their historic dependencies on bank funding. This appears to be happening – albeit it slowly. For example, in capital markets as well, we have seen more SMEs seek funding from direct lenders and private debt funds. Many SMEs have now learned their lessons from previous liquidity issues, which is why they are all trying to diversify their financing.

Activity on MARF since its inception has been buoyant with 97 companies listing their fixed income securities, six of which are Portuguese. Last year, 11 new companies issued fixed income securities on the MARF for the first time. Although issuance volumes suffered a hit in March and April 2020, they recovered quickly with issues totalling €9.6 billion last year, a moderate 7% drop from 2019. At year-end 2020, the total amount outstanding on the MARF stood at €5.3 billion, up 3.8% on 2019.

Investors are diversifying their portfolios as they are hungry for yield. SME fixed income securities listed on MARF provide solid spreads, making them very attractive. As a result, we have seen investors take on more risk by moving away from traditional issuers towards mid-caps offering better yields. Among the biggest investor trends right now is the increasing demand by allocators for access to ESG (environment, social, governance) focused assets. This is something which needs to be onboarded by fixed income issuers. This growing interest in ESG comes as the EU introduced its Sustainable Finance Disclosure Regulation (SFDR), a reporting requirement under the Action Plan on Sustainable Finance. As part of the SFDR, institutions will be required to disclose how they incorporate sustainability into their investment processes. Investors are also taking technology more seriously. Historically, fixed income markets were traded OTC (over-the-counter) but we are now seeing greater ”electronification”, in what should lead to more efficiencies and better transparency. 

One of the main challenges continues to be around electronification, namely how do we shift more OTC volumes onto our platform. Certain regulations have also been a recurring problem in fixed income circles. Despite being introduced more than three years ago, some of the transparency and reporting requirements outlined in the EU’s Markets in Financial Instruments Directive II (MiFID II) have proven to be quite challenging for fixed income market participants.

We are continuously monitoring our trading platform and will make the necessary technology adjustments  to it as and when it is necessary. Such evolution is critical to our business success. Looking even further ahead, we are thinking outside of the box in terms of innovation. We are exploring a number of disruptive technologies including DLT (distributed ledger technology) and crypto-currencies. We are assessing the viability of DLT to facilitate the issuance of tokenised fixed income securities. Tokenisation is something we believe could make it easier for investors to access fixed income markets, thereby driving up liquidity. Tokenisation could also help bring more transparency into the market. These are all initiatives that we are actively pursuing.