Hold on to your portfolios, private equity pros and hedge fund honchos: A new survey says that following the credit crunch, the leveraged finance market may not recover until May 2008.
According to the survey, over two thirds of hedge funds, p.e. firms, investment banks and corporate law firms believe it will take more than nine months for the market to recover, with 45% believing it will take as long as a year.
Whenever the market does come back, lenders will have a greater focus on financial covenants: While over half (52%) believe covenant cure rights, a specified period when borrowers can attempt to fix covenant breaches before they become actual loan defaults, will remain standard fare, almost all (92%) are convinced that covenant-lite, or lax restrictions in covenants, is an approach that will not come back in the foreseeable future, and 85% believe that financial covenant mulligans, or provisions that do not treat covenant breaches as defaults unless that the breach occurs again in the next quarter, are similarly unlikely to appear in new deals.
“It is unlikely that the long-term future of the leveraged finance market has been materially affected by the liquidity crisis, but whether features like covenant-lite will re-emerge when the market picks up again is less clear,” said Tomas Gardfors, a banking partner at Norton Rose, which conducted the survey. “It may be that arrangers have long memories and the market will seek to retain sizeable A tranches for a longer period as banks implement stricter credit controls.”
“The timing of recovery is also heavily dependent on the macro-economic factors surrounding financial markets generally,” said fellow Norton partner James Dunnett. “The return of liquidity, and continuing growth in the major global economies, are key to continuing growth in the leveraged finance market.”
And in uncertain times, banks have less appetite for riskier debt. More than two-thirds (68%) say that a lesser use of payment in kind loans is likely, or even very likely, in the immediate future.