“Lenders under fund leverage facilities are looking out for covenants of the underlying loan assets to be breached, amended or waived under the market conditions, and to see if those assets could then fall out of any eligibility criteria,” says Paul Tannenbaum, partner at Mayer Brown. Consumer-oriented industries and supply chain disrupted sectors appear most vulnerable. Discussions at the European Direct Lending Forum, co-hosted by and last month, turned to the dynamics between banks and direct lenders in times of market volatility and the need for reasonable flexibility in eligibility criteria.

What direct lenders really want from banks is stability in times of market volatility, panellists agreed, and making sure there is no immediate margin call. They argued the bank-lender relationship was very much a partnership, with banks looking to support direct lenders as much as possible. “If the volatility does trickle through into company financials, then we have a mechanism for marking those assets down away from their cost price and we will try and allow the portfolio to remedy itself via cash sweeps,” said Arun Cronin, managing director at Credit Suisse. “We switch on a cash sweep to delever the debt facility and then we continue as normal, which obviously hurts the cash yield to the investors, but is a much less draconian measure than trying to take control of the portfolio.” “It will be interesting to see how the newcomers react,” says one fund leverage provider. “Some of our managers are asking for waivers for two out of three assets.”