March 30, 2020
Direct lenders around the world are talking with borrowers about easing interest payments, waiving penalties and relaxing covenants as they assess the growing damage to their portfolios caused by the coronavirus pandemic.
The discussions are occurring as the global turmoil seeps into the $812 billion private market. The crisis is one of the first major tests for the asset class, which has grown from about $200 billion before the 2008 financial crash — buoyed by investors including pension funds, insurers and family offices.
The current upheaval is triggering a torrent of revolver draw requests, and forcing direct lenders to decide just how flexible they can be on already existing credit facilities.
“We’re having some high-level conversations about making some temporary allowances,” like relaxing interest payments or waiving covenants, said Antonella Napolitano, global head of investor relations at middle-market lender Deerpath Capital Management. “We will evaluate these on a case-by-case basis. We are a reasonable lender, but at the end of the day we need to protect investor capital.”
Globally, there is some $339 billion of middle-market debt outstanding to the most virus-sensitive sectors, including autos, airlines, drugs and textiles, according to UBS Group AG strategists.
In North America, at least a dozen direct lenders are considering or have agreed to specific concessions such as switching to alternatives to cash for interest payments or relaxing pre-payment penalties, according to people familiar with the matter. Some who work primarily with private equity-backed companies are resisting making any changes like considering relaxing payments or waiving future covenants unless the firm’s sponsors put in more capital or provide fund guarantees, said the people, who aren’t authorized to speak publicly.
Toronto-based Bridging Finance has already granted a request from at least one borrower to switch to payment-in-kind interest, according to founder David Sharpe.
“We are open to working with our borrowers and looking at accruing interest if required to get through this period,” Sharpe said. “We are non-distressed lenders.”
The requests are even filtering down to those who provide financing to small corporate borrowers, like lower-middle market lender JB Capital.
“For anybody that’s taking a hard line, whether it’s a mortgage company or a private credit line, not giving some degree of flexibility, there’s probably a special place in hell for those guys,” JB Capital founder Jeremy Hill said.
In Europe, similar requests from borrowers facing liquidity crunches are flooding in.
Ares Management, the $149 billion alternative asset manager, is “working with our U.S. and Europe portfolio companies, and their sponsor owners, to determine how we can be supportive with their liquidity needs to keep their businesses operating,” said Michael Dennis and Blair Jacobson, co-heads of European credit at the firm, in an emailed statement.
As of this week, French alternative investment firm Tikehau Capital has been asked for waivers by two companies heavily impacted by local lockdowns, the firm’s head of private debt Cecile Mayer-Levi said.
“Zero revenues is something unheard of and difficult to cope with,” Mayer-Levi said. “Depending on the situation we’ll be supportive, and play our role as a stakeholder alongside shareholders.”