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Corporate Loan Market Trends - Bouncebackability and Beyond

  • United Kingdom
  • Banking and finance
  • Corporate
  • Corporate finance
  • Distressed - Stressed financing and special situations

06-01-2022

 

Bouncebackability, defined as the ability to recover quickly from setbacks, is a phrase often used in sporting circles. That said, with 2021 now behind us, it could be equally used to describe how economies, as well as the capital markets, have rapidly recovered and maintained their resilience since the nadir of 2020, when the global pandemic first emerged.

Evidence of a “V shaped economic recovery”, a “record year for Global M&A” and a “wall of available capital across financial markets”, certainly points to the fact that that we close out 2021 in a much better position than where it started, but what does this all mean for CFOs and Treasurers who are considering their financing strategies and potentially accessing the loan markets in the year ahead?

We begin this article by looking back at how the loan market has performed in 2021, before briefly considering the key aspects borrowers should consider as we move into the year ahead.

Whilst equity and debt capital markets experienced volatility in the early part of the year, the loan markets remained open and resilient as they have done generally throughout the pandemic. With market conditions normalising as economies reopened, elevated loan pricing levels seen at the beginning of the pandemic began to reduce towards pre-covid levels, and tenors, which had contracted, as banks looked to preserve liquidity, began to push out again.

Whilst the largest Corporate borrowers are now able to access 5 year maturities again, for others it is often about trading tenor for price, particular with lenders laser focused on achieving return on capital hurdles and maximising ancillary business. Indeed, for many mid-market borrowers seeking to refinance, we have seen 3+1+1 tenors becoming an acceptable compromise.

In the earlier part of the year, we saw many borrowers choosing to delay a full refinancing, opting instead for short term extensions to existing facilities in order to take advantage of the expected improvement in financing terms. Some delayed specifically to obtain more clarity on the process for LIBOR transition ahead of the year-end deadline to ensure their documentation reflected the best tried and tested solution. What this resulted in was a busy last quarter of 2021, with a number of borrowers signing their refinancing transaction in the run up to Christmas and others expected to come to market in the near term.

M&A has certainly returned strongly to the agenda during the year, fuelled by corporates recovering as well as realigning business models, whilst others have accelerated non-core disposals to generate cash for deployment elsewhere. Banks have been very receptive to this type of lending which can be profitable business for them, assisted by the extra fees and ancillary business that can be available by offering debt, equity and advisory services to their clients.

The Leveraged Finance mid-market also enjoyed another busy year. Fuelled by the significant amount of private debt capital raised from yield hungry investors, debt funds have competed hard to deploy this capital to fuel Private Equity with the firepower to compete aggressively in M&A situations against strategic buyers. Terms, if anything, for this type of lending have weakened from a lenders perspective, with pricing, covenants and documentation all coming under pressure for the best credits in a competitive landscape.

So with the pandemic continuing to challenge science and society, how is the current economic backdrop likely to play out in terms of loan market activity in 2022?

With businesses on the whole adapting well and demand in many sectors outstripping supply, loan markets should again remain resilient, with good credits able to demand the best terms. Banks will continue to manage their balance sheets to ensure their return on capital aspirations are met, which may mean smaller hold levels in some cases, leaving room for less relationship focused lenders to join syndicates and clubs to mop up the required liquidity.

As a result of excess demand being experienced in some sectors, many CFOs are forecasting expansive strategies, with a focus on capital investment, particularly in new technologies. As such, heightened demand for additional liquidity facilities for either M&A or organic purposes can be expected.

2021 saw exponential growth in sustainable finance, a trend which is expected to continue. Given the focus of many stakeholders on climate and social factors, businesses now recognise that a sustainability strategy is necessary to stay relevant, remain competitive and create long-term value. In tandem with this, capital providers are also highly motivated to lend sustainably and many increasingly see sustainable credit as good credit (and vice versa). Whether borrowing for specific green or social purposes, or linking general corporate facilities to the achievement of sustainability targets which can reward the borrower through margin incentives, we fully expect sustainable lending to become business as usual over time, with unsustainable activities increasingly finding it harder to source cost effective capital.

So, in many respects, whilst conditions for the year ahead are generally expected to remain favourable, some economists are expressing a note of caution. With labour shortages and supply disruptions expected to continue well into the year and with inflation concerns putting further pressure on some, it is feared that some businesses are likely to experience an element of margin contraction. Furthermore, in what has been a period of low default levels, some commentators are also predicting a rise in insolvencies as government restrictions and other emergency support schemes are relaxed.

Having hopefully weathered the worst of the pandemic storm, albeit with the recovery somewhat polarised across different sectors as new variants are understood, most Western economies have returned to their pre Covid levels. As such, the Corporate Loan Markets in 2022 should continue to remain a supportive environment for Borrowers and a steady demand for refinancing as well as for M&A capital is expected. In terms of the supply side, banks and other capital providers generally remain liquid and will be keen to deploy funds to meet their internal objectives, with Corporates continuing to balance their short and longer term sources of capital from a diverse range of markets.