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Direct lenders say coronavirus storm enables them to show benefits of bespoke lending
February 2021 | Issue 231
Michelle D’souza
Reporter
European credit managers are bracing themselves for setbacks after a new set of lockdown and curfew measures kicked off 2021 on the continent.
Company earnings could drop for portfolio companies, but most retain a positive outlook and say the situation is a storm that is perfect for direct lenders, which can provide committed, patient, large, bespoke capital.
Government assistance, lenders being flexible and covenant waivers helped companies get through 2020, but many with reasonable balance sheets will have to have some tough discussions with lenders in Q1, depending on how the latest set of social distancing rules evolve.
The focus in the next three months will be on consumer-related companies where a recovery was expected to have begun were it not for a spike in coronavirus cases and resultant government intervention, says Patrick Schoennagel, managing director at Houlihan Lokey in London.
“Lockdowns do not automatically turn good businesses into bad ones”
Arun Cronin, Managing director | Credit Suisse
A large proportion of direct lenders remain focused on defensive sectors, such as software and healthcare, but it seems likely that covenant breaches and liquidity crunches will increase.
The drop in some companies’ earnings could also impact leverage facilities, with some containing valuation haircuts which are based on financial metrics, such as a company’s debt-to-ebitda ratio. The application of these haircuts can cause facility loan-to-value ratios to become elevated, potentially triggering events such as cash flow sweeps and reducing cushion to event-of-default thresholds.
Credit Suisse was flexible during periods of dislocation, says Arun Cronin, managing director at the bank. He says it was able to provide borrowing base stability by waiving features that were adversely impacting borrowers. Most of these waivers are in place for six months.
“We took this approach in order to give companies in the most impacted sectors some time to recover,” he says. “A good business does not automatically become a bad one because of a series of lockdowns. We have found that the underlying companies have generally had adequate liquidity runway to survive the lockdowns.”
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Global credit funds & CLO's
February 2021
| Issue 231Published in London & New York.
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