The challenging interest rate, geopolitical risks and regulatory environments have all contributed to a notable slowdown in the Irish financial services sector activity in 2023. In this challenging environment, we remain at the leading edge of the financial services sector with deep involvement in all areas of activity by relevant entities. In this article, we give an overview of the issues impacting the sector and its participants.

Bank deleveraging

In the bank deleveraging space transactions involving the sale of mortgage debt have been slower to complete as the industry seeks to find answers to the “mortgage prisoner” issue. The Banking & Payments Federation Ireland (BPFI) has announced a range of initiatives to help customers who are struggling to meet higher repayments.

We are seeing that banks are increasingly looking at other routes to reduce their non-performing exposures. Meanwhile, we have seen an increase in secondary trades and trades of unsecured debt.

General corporate financing

Given the challenging interest rate environment, there are notably fewer financings in the market. That said the first quarter of 2023 was busy, and we acted on several domestic and cross-border corporate acquisition financings.

Q2 and Q3 on the other hand have certainly demonstrated a noticeable reduction in the number of corporate financing transactions. We expect that trend to continue past 14 September 2023 when the ECB next meets. The uncertain interest rate environment means lenders are more insistent on hedging being in place at drawdown instead of relying on trigger mechanics.

Acquisition finance

There are still reasonable levels of activity in the market, particularly smaller-scale acquisitions, despite the inevitable consequences of the changed interest rate environment. Tighter margins have caused slower and stickier credit processes.

While there is still appetite to lend, issues persist in getting term sheets approved and this remains a challenge. As a result, we have seen a trend towards sponsors using their own cash to ensure that an acquisition happens quickly, with a view to refinancing their investment with bank debt after completion.

Real estate financing

New real estate investment facilities have been limited this year, and refinancings of existing facilities have dominated the market. An uncertain interest rate environment, lack of high ESG/green building stock, and a slowdown in the multinational tech sector have combined to impact the office sector considerably.

While rising construction and finance costs continue to negatively impact development finance, including residential development finance, we are seeing a solid pipeline of new financings for Q4, particularly in the starter home space. The softening of yields in the private rental/apartment sector has translated into a scarcity of forward sales in the market compared to 2022.

Project financing

The provisional results of the third round of the Irish Government’s renewable energy support scheme auction, RESS 3, are eagerly awaited before the end of September, with final results expected on 9 October 2023. This is the first Irish onshore auction where the price is partially indexed for inflation. 70% will be fixed for the duration of the support, and 30% will be adjusted for inflation based on the EU Harmonised Index of Consumer Prices.

This has been criticised as prices in other countries which operate similar schemes, such as the UK, are 100% linked to the Consumer Price Index. It remains to be seen whether this new measure will reduce the level of attrition seen on RESS 1, where only 12 of the 82 successful projects had reached financial close in May of this year.

Projects that were successful in the RESS 2 auction have largely not yet completed a financing process, with some of the first projects expected to reach financial close in the coming weeks. Anecdotal evidence suggests that more projects from that auction will be financed than in RESS 1, with a number of financings in the pipeline for Q4. This increased uptake appears to be at least partially due to a higher strike price than that determined for RESS 1. The attrition to date can be largely attributed to the wider environment of high inflation and interest rate increases, coupled with a fixed price for a 15-year period of support. Continuing delays in the planning system are also expected to impact the pipeline of projects likely to be eligible to bid in future auctions.

Aviation and asset finance

Sustainability is a key challenge facing the aviation industry. Achieving a more sustainable model of air travel is a key focus, and this is likely to continue with availability and terms of finance becoming influenced by achieving ESG targets.

Major lessors have set ambitious targets to trade older aircraft to acquire new technology over the next three years. High interest rates have made it more difficult to access traditional commercial debt and we are seeing an increase in alternative funding being used to part-fund aircraft purchases.

Private equity investment in joint-venture vehicles is on the increase. Time will tell whether these platforms will be available for the long term or will be sold down to coincide with a decrease in global aircraft supply post-pandemic.

Debt capital markets

There continues to be good demand for Irish special purpose vehicles, using Ireland’s section 110 regime. We have acted on several new repack programmes in 2023, with more working through the pipeline at various stages. On the mature repack programmes, we have seen a steady flow of new series issuances, with a wide variety of underlyings. These underlyings include German treasuries, physical gold, student loans and US life policies.

Despite the challenges of an uncertain political and economic environment, transactional activity has continued, but spread across a variety of instrument and transaction types, but there have been plenty of cases during the year where well-advanced deals failed to complete due to perceived market risks and uncertainties.

Financial regulation

Industry pushback against the Central Bank of Ireland's (CBI) individual accountability framework / senior executive accountability regime (IAF/SEAR) has begun to mount as financial entities advance their implementation projects. Industry groups and professional bodies have raised concerns regarding the potential negative impacts of the IAF/SEAR regime on FDI and talent recruitment and retention in the FS sector.

Tech firms interested in Ireland as an EU base for cryptoasset trading under the Markets in Cryptoassets Regulation (MiCAR) await implementation proposals from the CBI/Department of Finance, with Luxembourg and the Netherlands gaining ground in the meantime. We have seen clients struggling with the implementation of the EU’s Digital Operational Resilience Act (DORA), with the broad definition of in-scope contracts that could require remediation causing difficulties.

Investment funds

The sector is facing extensive regulatory change, with clients focused on the EU review of the Alternative Investment Fund Managers Directive (AIFMD), implementation of the European Long Term Investment Fund Regulation 2.0 (ELTIF 2), the Department of Finance Funds Sector Review 2030 and the CBI’s discussion paper on a macroprudential framework for funds.

Taken together with cost pressures in the industry and the continuing impact of cross-sectoral regulatory change, such as the CBI’s Cross Industry Outsourcing Guidelines, fund managers and administrators have full agendas facing into 2024.

How we can help

Across our financial services sector practice, we have deep specialist knowledge of not just the legal issues, but also of the industry issues affecting the sector. We are uniquely well-positioned to guide our clients through the challenging times ahead, so please don't hesitate to contact a member of our FS Sector team to discuss these or any other legal or regulatory topics of concern.

The content of this article is provided for information purposes only and does not constitute legal or other advice.