Global credit funds & CLO's
May 2020
| Issue 223
Published in London & New York.
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May 2020 | Issue 223
Direct lenders turn on liquidity taps as major Q2 test awaits
Michelle D’Souza
Michelle D'Souza headshot
European direct lenders have been on hand to support their portfolio companies with liquidity over the past two months, sources say. These moves come despite uncertainty over the full impact the coronavirus pandemic will have on businesses in the second quarter.
There have been some covenant waivers, says Dechert partner Phil Butler, but these are the exception rather than the rule as lenders are reluctant to provide them.

London-based Butler says: “Many companies have had significant liquidity issues, particularly in sectors such as retail, leisure and travel. Lenders have generally been supportive in terms of giving consent to a variety of requests, including interest deferrals, allowing super senior working capital lines to be drawn or increased, and providing flexibility around the uses of cash.”

He adds that one company had planned to use its cash on development capex, but its lenders are allowing the money to be used for working capital.

Jaime Prieto, founding partner at Kartesia in London, says the firm screened its portfolio companies early on and placed them under various stress tests.

He says: “We have been able to provide additional liquidity to those that needed it in the first three weeks, and have shared best practices across the portfolio companies to mitigate the impact of the lockdown, with a clear focus on cash preservation while revenues are impacted.”
Banks too have been supportive with revolver requests and have even increased facilities.

However, sources say banks have so far resisted deferring interest.

“In the eyes of the bank, it’s a payment default that incurs a higher regulatory charge,” says one direct lender.

These conversations are expected to be more challenging after 30 June, when second quarter financial results trickle in.

Another issue is the reaction of private equity sponsors.

“The question in cases where the capital structure of the business has been irreparably damaged is whether the sponsor will step up to put more money into the business and, if so, what will they expect in return from lenders,” says Butler.

“Equally, lenders will be thinking: has the sponsor done enough? And what new covenants, controls and restrictions on the business do I need to protect against underperformance.”
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“We have provided additional liquidity to those that needed it”
Jaime Prieto,
Founding partner | Kartesia
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