Leveraged finance - Covid waivers
Lads, have been snowed under with credit waiver requests and find it interesting that no one really knows how post covid businesses will perform - and I mean, literally, consumer goods borrowers could rally / make full recovery or just suffer a loss of consumer interest. revenue could be >100% levels it was before if you believe in latent demand or 10% prior levels if you think unemployment / economic outlook will drastically impact demand.
I suppose one can only resize covenants to allow lender step ins if shit hits the fan, but it's essentially kicking the can down the road to see how things will go post Covid. curious as to how you credit lads are seeing things - similar or taking a different approach altogether?
Seeing alot of amendments and waivers too, generally lenders very receptive of waivers. Initially saw RCFs fully drawn too. Retail and leisure sectors seem to be hit hard.
In terms of financials, don't think it will be as quick recovery as expected with >100% revenue etc., businesses opening gradually and economy expected to have a steady, gradual recovery. Models I've seen reflect this and project covenant headroom to be tight for the coming months. Has been interesting to talk about capacity of shops, cinemas etc with clients band model accordingly with everyone having little experience, feels like CFOs are making up scenario forecasts and we are changing them every time we get sent.
As you alluded to earlier, next few months to October will be key, after the government loans run out, could spur more restructurings.
My view is we'll definitely see a shake out in the weaker companies that were already struggling pre-covid in the near term. Given the very recent reversal of covid cases since mid-June in the US, the impact of the pandemic is obviously going to be more prolonged than most people previously expected (so much for it going away in the summer) and I doubt many companies have enough liquidity, or available capacity to incur additional debt for that matter, to survive until a vaccine is developed. Lender receptivity for amendments/waivers will probably shift too and my guess is there will be some much more difficult conversations next time around.
>I suppose one can only resize covenants to allow lender step ins if shit hits the fan
Would you please be so kind to explain what you mean by this to someone who has never had to deal with a lender before (eg needs basics)? Thank you
It just means giving the borrower some relief on their covenant levels - for example: if the borrower's existing debt has a covenant set at 5.0x total leverage (debt/ebitda), lenders might agree to give the borrower more flexibility by temporarily increase the covenant level to 7.0x so the borrower doesn't immediately trip a default because their earnings tanked because of the pandemic.
The US is a bit behind Europe regarding Cov - ie you guys still booked revenues early April when it Europe some where already at a big 0.
What’s interesting is that some well capitalized businesses have gone through the crisis without needing more debt, yet over Q2 (or at least estimates) say that they will have 0 or negative EBITDA. The issue with that is that other than removing your leverage covenant you can’t do much.
Agreed with the above - there comes a point where lenders will have to take a view that even though borrowers claim covid Impact will be short term, I.e. Ebitda Low or zero for a few months and only require temporary covenant waivers, this might not be the case or in line with lender risk appetite - and ultimately start requiring equity injections / debt pay downs...
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