M&A and leveraged finance activity came to a halt in the second quarter amid the peak of the coronavirus crisis and non-bank lending decreased 29% to 140 deals, compared with 197 in the first half of the previous year, according to the Alternative Lender Deal Tracker report by debt advisor Deloitte.
So-called first out, last out, or FOLO, unitranche facilities have become less popular during the period - especially for the partnering bank in the financing, the report said. Those structures usually include a first lien, super senior loan plus RCF provided by a bank and a second lien, senior loan from a private debt fund. Continue reading for the EMEA Middle Market team's coverage of European leveraged finance activity, and request a trial to access reporting and analysis on hundreds of high-yield and performing credits.
With Covid-19 affecting nearly every sector, a large number of borrowers across Europe have drawn on their RCFs with existing bank lenders to battle short-term liquidity issues.The drawing of these lines has a direct impact on the bank’s balance sheet, challenging its risk profile.
“For banks, RCFs are often unprofitable as undrawn returns are low, whereas default risk increases significantly when RCFs are drawn for a sustained period of time,” Floris Hovingh, head of alternative capital solutions at Deloitte Debt Advisors said.
Debt funds capable of providing revolving credit could fill the void banks are leaving retrenching from FOLO structures. Within the last few weeks direct lenders with the capability to provide RCF lines have outperformed competing banks in debt financing deals, a debt advisor told Reorg.
According to market participants this development could overall lead to higher pricing for revolving credit lines. “At some point pricing for RCF will have to increase significantly to make this attractive on a standalone basis,” Hovingh said.
-- Kerstin Kubanek