The future of the leveraged loan market
As the coronavirus pandemic disrupts the economy, the financial health of the leveraged loan market has been affected. The long-term effect of the pandemic on the leveraged loan market will depend on the inherent market risks, the extent of the pandemic, and the government’s response to the crisis.
State of the leveraged loan market
At the end of last year, total leverage loans outstanding were estimated at just under $ 2 trillion, of which $ 1.3 trillion was held by institutional investors, according to testimony during an SEC committee hearing last September. The average leveraged transaction has a total leverage of 5.5 times EBITDA, which is more disciplined than before the financial crisis of 2007-2008. In the middle market, banks continue to face increased competition from non-bank lenders who do not face the same regulatory pressures. This competitive environment, particularly in the sponsored debt buyout space, has forced banks to compromise on pricing and covenants to maintain their market share. More flexible covenants, including covenant-lite loans and less stringent underwriting standards due to increased competition and the migration of sponsored trading terms from large-cap markets to the middle market, had led to a greater risk of default. Marlet. In addition, EBITDA continues to be broadly defined through the use of EBITDA add-ons, resulting in the possibility that the leverage will be greater than what is reported.
Impact of the coronavirus pandemic
In the short term, the pandemic has increased the use of gun facilities for cash-strapped businesses or, when a business does not have immediate use of funds, to make withdrawals out of prudence. Lenders authorized the drawdown of $ 215 billion between March 5, 2020 and April 9, 2020, according to S&P’s Leveraged Commentary & Data service. During this period, companies also deferred or changed cash payments to save money.
The long-term impact of the pandemic on the leveraged loan market is uncertain. It will be determined by the extent of the pandemic and the government’s response. Without external assistance or meaningful long-term access to liquidity, companies are likely to default on their payment obligations and default on their financial commitments. Fitch Ratings revised its March 27 default forecast for U.S. leveraged loans for 2020 to 5% -6%, from 3% previously forecast. This equates to $ 80 billion, surpassing the previous record of $ 78 billion in 2009. Defaults are expected to be highest in the energy, non-food retail, restaurant and food industries. travel and leisure.
Another concern is the ability of companies to refinance their loan obligations as they come due. According to the S&P LCD screen, March 2020 was the first month since December 2008 that the primary syndicated loan market had no new issues. As reported by Refinitiv LPC, new cash lending under mid-market sponsor-backed transactions in the syndicated loan market during the first quarter of 2020 amounted to $ 7.6 billion, in 15% decrease compared to the fourth quarter of 2019 and 13% year-on-year. The slowdown in new loans could be an indicator of refinancing opportunities. Some lenders have signaled their willingness to work with businesses on waivers, deferrals, and forbearances. Businesses should proactively contact their lenders when liquidity issues arise or in anticipation of refinancing.