The coronavirus pandemic halted the issuance of syndicated mid-market loans in the second quarter, reflecting a decline in activity among large-cap counterparts. Uncertainty and extreme volatility frozen activity and closed the curtain on buoyant conditions in the syndicated market in early 2020. LCD data on new syndicated loan volume from borrowers with debt levels of $ 350 million or less reflected the attitude. The riots left some transactions in the balance, but a series of government incentives restored confidence. Among other things, the federal programs led to an increase in secondary credit prices, which was decisive for the revitalization of the primary credit markets. According to sources, there was a trend reversal in new loan issuance at the beginning of May. Little by little, new business emerged, including transactions negotiated before and after the COVID-19 sell-off.
Private loan providers returned to the market before the syndicated market began to thaw. Once considered an antidote to bear market conditions in the syndicated market, personal loans have become a common practice over the past decade. These lenders, who grant and retain all or part of the credit, have been playing a growing role since the credit crunch a decade ago. One measure of how the market has changed is the percentage of direct-granted loans in Business Development Company (BDC) portfolios as of March 31, at a high since LCD began tracking BDC data.
Behind the trend towards personal lending are borrowers and their private equity sponsors who forego the syndication process and instead opt for single lender or small club solutions with a handful of lenders. Dealing with a smaller group of lenders of two to five as opposed to dozens when a loan is being syndicated can be easier in negotiating loan agreement changes and servicing.
In the second quarter of 2020, lenders entering the market found that after years of wafer-thin spreads and easing of loan documentation requirements, conditions had turned in their favor. For deals that crossed the finish line after investor confidence returned, returns had increased, covenants tightened, and leverage levels had decreased, sources say.
But not everyone was able to play in the COVID year of the deals. And those lenders who had the money to do the work offered smaller sums, which required sponsors to make more calls and engage more participants than if the big buy-and-hold program was in place.
The crisis sheds light on the strength of the capital structures and lending standards that ruled the pre-coronavirus era. In addition to underwriting, industry choice plays a major role in today’s success stories – as does a certain amount of luck. Some victories came from unusual places: companies like the distribution of gourmet cheese. Another bright spot was technology, especially software providers, who are benefiting from pricing models that result in constant revenue.
Below is LCD’s full Q2 Middle Market Review for notable Q2 transactions, the latest liquidity withdrawals by US BDCs, and a full list of US personal loan deals for the IT sector.