Addleshaw Goddard's Alex Dumphy, Murray Jack and Peter Crichton were joined by DC Advisory's Edward Godfrey to discuss the future of Private Equity with regard to the Covid-19 crisis. Below is a summary of the webinar's main findings.
The Debt Market Landscape for Private Equity Borrowers in the Covid-19 World.
Liquidity, liquidity, liquidity:
- Sponsors and investee companies quickly recognised that liquidity was key, drawing RCFs, deferring amortisation, cancelling cash sweeps and deferring interest on TLBs
- The pulling of those levers was on the whole, supported by lenders and there is a feeling (for the time being at least) that we are 'all in this together'
Financial covenant packages in the new world:
- We have seen the suspension of financial covenants (leverage and cash cover) across the portfolio for 2 to 3 test periods (typically March to September)
- Lenders are asking for minimum liquidity tests and weekly/fortnightly cash flow forecasts in lieu of those covenants
Comparing Covid-19 with the financial crash:
- There would appear to be more liquidity in the market now than in the financial crash
- Banks are better capitalised and debt funds also seem to have capital available
- Governments themselves are also responding – although private equity and their investee management teams will be feeling frustrated that certain UK liquidity schemes continue to be closed off to them
Securing on-going lender support:
- The key will be for sponsors and management teams to be as best prepared as they can be, everything will be framed by numbers and the budget forecast
- Lenders, sponsors and management will have to be as realistic as possible
- The ask of lenders will need to be sensible as some requests that were going to lenders at the start of the crisis were perceived to be overreaching and therefore were rejected
Emerging from the crisis:
- We anticipate a second rush of funding requirements come the end of summer / early autumn as the UK moves out of lock down. Businesses will be turning on their fixed cost base after lockdown and will need the cash to do that – at a time when cash reserves will have been depleted over the summer (non-trading) period
- It will be interesting to see if the collaborative approach currently taken will cease when the difficult questions of viability arise
Do we expect a wave of business failures?
- In short we do anticipate more corporate failures. One driver to that will be when government support schemes are withdrawn and/or tapered
- Government legislation coming through is moving to a more US style insolvency regime with moratoria and the suspension of winding-up petitions – it will be interesting to see how/if the government makes these temporary measures more permanent
How will lender terms change?
- This will be interesting to see, as it could go two ways.
- Pricing increases on debt are anticipated across the board, however with deals scarce we do wonder whether the need to deploy capital from lenders will supress or at least control those margin increases
- Deals in stable sectors with recurring revenues will become even more attractive for sponsors and lenders alike
- We do anticipate that some lenders will look to try and claw back some documentary terms – after all – if they don’t do it now, when will they?
You can watch the recording below.