Leveraged Finance: Stepping Into The Void

• Published date: 10 December 2020
• Subject Matter: Finance and Banking, Debt Capital Markets, Financial Services
• Law Firm: Ocorian
• Author: Ms Sinead McIntosh

As funds continue to reallocate capital to direct lending strategies, Business Development Director, Sinead McIntosh provides an overview of the leveraged finance market and highlights the crucial role of independent loan service providers in streamlining fund loan portfolios. *

In a continuation of the legacy of the 2007-8 global financial crisis, large commercial banks remain distanced from lending to middle-market and lower-middle-market companies. Their successors, collectively known as 'alternative lenders' and largely made up of private debt funds, continue to fill the void left behind by providing the necessary capital for businesses seeking alternative sources of financing.

Institutional investors are increasingly engaging with these non-traditional debt options. They provide higher-yielding, shorter-term investments than public bond markets and have low correlation to public market volatility.

However, market uncertainty over the implications of COVID-19 and subsequent government stimulus saw direct lending deals completed in Europe in H1 of 2020 fall by 29% compared to the same period last year. This put the brakes on an increasingly competitive private debt market, with companies instead able to raise money from cheaper public debt markets.

But fiscal support is now withdrawing, commercial banks are continuing to retrench, becoming increasingly risk averse and focussing on managing their existing portfolios. Moreover, optimism around a COVID-19 vaccine is returning confidence to markets. Together with pent up demand and an absence of deals, alternative lenders are seizing the opportunity to step into the leveraged markets the banks have less appetite for, competing to deploy capital.

Growing pains

Every crisis brings with it an opportunity for re-invention, innovation and collective agility. And those firms that pivot to direct lending strategies with adequate scale, capital and expertise will be the most successful. However, many mid-market funds looking to...