Boston, MA – Capstone Headwaters released its Q3 Middle Market Leveraged Finance Report today with insight on the volume, pricing, and leverage statistics of today’s credit markets.
Middle market (MM) loan volume recovered modestly in Q3, but nonetheless represented a fraction of historical levels. The rapid roll-out and adoption of government stimulus packages, including the Paycheck Protection Program, somewhat mitigated the initial impact of COVID-19 on loan portfolios. Still, LCD’s survey of portfolio managers yielded an average anticipated default rate of ~5.3% for 2020 and over 6.0% for the period ending June 30, 2021, a level nearly 400 bps wider than the same survey results at the end of 2019. This pandemic-induced increase in defaults has caused lenders to rethink the way they amend credit agreements and support distressed borrowers in order to preserve value.
With COVID-19 disproportionately impacting certain industries, the shift toward higher quality borrowers has increased as lenders seek to add safety to their loan portfolios. This has exacerbated the bifurcation of the market between the haves and have-nots as issuers with consistent and/or growing cash flows continue to attract new capital while lesser-quality borrowers are often left searching for financing alternatives.
“While new-loan origination activity was certainly moribund at the onset of the pandemic, the credit markets have started their recovery with significant capital coming off the sidelines beginning in late summer,” said Kent Brown, Head of Capstone’s Debt Advisory Group. “In particular, businesses with recession- and COVID-protected models that have fared reasonably well during the crisis are now finding outsized interest from lenders seeking to deploy capital. While not yet back to January levels, the market certainly feels better.”
This strain is particularly felt in the MM where loan terms are decidedly lender-friendly for borrowers with EBITDA of less than $25 million. While lender activity has rebounded for higher quality issuers, pricing and terms among proposals will continue to vary widely as the pandemic and resulting market uncertainty persist.
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For More Information Contact the Key Report Contributor:
Managing Director & Head of Debt Advisory Services