U.S. Capital Advisory Group – Financing Market Update

Apr 2020

Private Credit Market Issues Amidst COVID-19

The current COVID-19 crisis is presenting numerous challenges for traditional middle market lenders.

 

     

Aggressive Revolver Draws

  • During the two weeks leading up to 3/31, many borrowers drew down on their revolvers; the unprecedented level of revolver draws caused a significant drain on lenders’ capital
  • Many middle market lenders indicate that their aggregate revolving facilities are 70%+ drawn, compared to a normal-course average of ~20% and prior peaks of ~40% during the Financial Crisis of 2008

     

Portfolio Underperformance

  • Due to expected portfolio underperformance and forthcoming company liquidity concerns, lenders are preserving capital in anticipation of requests to support challenged borrowers
  • Many more defaults are expected at 6/30, compared to 3/31, since the crisis began so close to the end of Q1

     

Potential for Deferral of Interest and/or Principal Payments

  • While 3/31 passed with fewer than expected interest and principal payment deferrals, the underlying issues did not disappear and will have to be addressed at 6/30 (or sooner)
  • Lenders could face significantly higher interest and/or principal deferrals at 6/30, causing them to conserve liquidity

     

Reduced Availability for Credit Funds

  • As portfolio company underperformance weighs on the valuation of middle market loans when “marked-to-market,” lenders are expecting covenant defaults and/or reduced availability on fund-level credit lines due to shrinking borrowing bases, negatively impacting the funds’ liquidity
  • Some lenders have already begun to pursue strategies to shore up liquidity (e.g. rights offerings)

 

These concurrent and systemic issues are leading to tightening liquidity across the private credit markets.

Although some traditional lenders are well-capitalized and will be able to deploy capital for new transactions, the market will continue to struggle in a number of areas.

 

Resulting Credit Market Activity

With a wide range of challenges facing traditional lenders, unconventional capital providers will drive a wave of private credit activity for the remainder of 2020.

 

Shorter-Term Remedies

  • Amendments and forbearances, either on a standalone basis or in conjunction with:
    • Capital infusions*
    • Bridges*
    • Rescue financings*
    • Fairness opinions

*Provided by sponsors, lenders, or third parties

Medium-Term Fixes

  • Restructurings
  • Lender-driven M&A
  • Structured capital solutions

Longer-Term Solutions

  • Refinancings
  • Dividend recapitalizations
  • Acquisition financings
  • Company sales

 

This surge of activity will bring a complex set of challenges that are the focus of Lincoln’s Capital Advisory Group.

Lincoln Has Expertise Across the Entire Capital Spectrum

Through its full-service platform, Lincoln maintains the capability to assist companies across the entire spectrum of capital needs.

 

Liability Management

  • Forbearance
  • Amendments / Waivers
  • Maturity / Reporting Extensions
  • Consent Solicitations
  • Negotiating Capital Injections from Existing Stakeholders
Capital Raising

  • Bridge / Rescue Financing
  • Structured Capital Solutions
  • Private Debt Alternatives
  • Refinancings
  • Growth Financing
  • Acquisition Financing
  • Dividend Recapitalizations

 

Financial Restructuring

  • Debt for Equity Exchange
  • Chapter 11 Restructuring
  • Out-of-Court Restructurings
  • Strategic Alternatives Review
  • Distressed Debt Buy-Back
Mergers & Acquisitions

  • Sell-Side Advisory
  • Buy-Side Advisory
  • Distressed M&A
  • 363 Asset Sales

Valuations & Opinions

  • Portfolio Valuation
  • Fairness Opinions
  • Solvency Opinions

 

Lincoln can help sponsors and borrowers weather the storm while positioning them for long term success.

 

Lincoln Perspective

Lincoln’s Capital Advisory Group is uniquely qualified to guide clients through uncertain times and towards optimal outcomes.

Full Suite of Capabilities to Address All Borrower Needs

  • Capital Raising
  • Liability Management
  • Restructurings
  • M&A Advisory
  • Valuations & Opinions
Superior Track Record of Success

  • 53 Deals Closed in the Past Three Years
  • Zero Hung Deals in the Past Three Years

Lockstep Collaboration Across the Lincoln Platform

  • Portfolio Valuation
  • Fairness Opinions
  • Solvency Opinions

 

Engaging Lincoln allows sponsors and companies to successfully navigate challenging market conditions and ensure the best possible outcome

Summary

Connect With Our U.S. Capital Advisory Group

Perspectives

Lincoln International’s Capital Advisory Group Identifies Global Financing Trends in 2021

Throughout COVID-19, one question has come up time and again: Are lenders open for business? The resounding answer: YES. There has been strong appetite among lenders to provide financing—especially for acquisitions—which built […]

No EBITDA, No Problem: Software Financing and the Rise of the Non-Bank Lender Market

The technology sector has been a bright spot for years. Even during the challenges created by the pandemic, our Lincoln International M&A bankers are seeing record levels of software investments from private […]

Webinar: Investing in Europe – Q&A on Executing and Financing Deals Post-COVID-19

Lincoln International hosted a virtual panel on January 28, 2021 featuring the firm’s experts from across Europe for a Q&A on some of the key considerations and opportunities for investors in the […]

Supply-Demand Imbalance Continues as Private Equity Looks to Deploy Capital in 2021

Pulse on Private Equity: Recent survey of more than 150 global private equity investors uncovers key trends heading into 2021. Sources: Mergermarket, Pitchbook