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Lenders Expect Increased Workout Activity in 2019, FTI Consulting Survey Finds
78% of Respondents Believe Number of Credits Monitored Will Increase
70% Expect Number of Credits Actively Managed Will Increase
Retail, Energy, Healthcare and Automotive Sectors Expected to See Most Distress
Seventy-eight percent of survey respondents from bank and non-bank lenders in
Meanwhile, 70% of survey respondents expect the number of credits actively managed by their workout group to increase over the next year, with 29% expecting the total to remain the same. More than half (59%) of respondents believe they will manage these loans with no increase to the number of dedicated workout professionals at their institution.
Lenders surveyed expect continued workout activity from retail or restaurants/dining (25% of survey respondents); oil, gas and other energy sectors (17%); and healthcare or pharmaceuticals (15%), with new activity coming from automotive (9%). While those findings are consistent with recent restructuring activity, the automotive sector has seen a peak in sales volume but has yet to experience material distress or restructuring activity.
Company-specific factors are the primary cause for loans ending up in workout, with 44% of bank lenders and 62% of non-bank lenders citing under-performance as the main driver. Bank lenders were more likely to cite industry-driven trends or macro-driven trends, such as trade policy or commodity prices, as the primary cause for workouts compared to non-bank lenders.
Liquidity needs appear to be leading borrowers to deal with lenders, according to survey findings. The ubiquity of covenant-lite loans may influence this outcome, with only 25% of workouts being attributed to a financial covenant violation, the survey found.
Demand for leveraged loans as an asset class is expected to remain strong, according to a large majority of respondents. Of all respondents, 40% of bank lenders believe demand has peaked or is peaking, compared to just 21% of non-bank lenders. Only 16% of bank lenders believe demand will remain strong through 2020, compared to 35% of non-bank lenders.
Covenant-lite loans, once considered an exceptional accommodation for stronger credits, have become a lending norm, accounting for more than three-quarters of institutional loan volume in 2018. Approximately 75% of respondents believe loan recoveries will be lower for covenant-lite loans than for loans with traditional covenants.
“The absence of financial covenants means borrowers are able to stay in control of deteriorating situations without lender intervention longer than they otherwise would be. For sponsor-owned companies with deeply impaired loans, this prolonged control effectively creates equity option value for sponsors that can be an inducement for them to swing for the fences,”
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