Direct lending’s new year euphoria

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Q4 2020

Feature

Robin Armitage

Researcher Creditflux

Replies to our annual direct lending survey reveal that, after the trials and tribulations of 2020, direct lenders are much more bright-eyed and optimistic in their outlook for the year to come

How much do you expect European-focused direct lending funds to raise in 2021?

94% of survey respondents expect European-focused direct lending funds to raise more than €20 billion in 2021. In our 2019 survey, only 63% of respondents anticipated this, yet fundraising blew away expectations with record-breaking sums (€37 billion). 84% of respondents said the same in the 2020 survey, though funds ultimately raised just €16 billion in a tough year.

Do you anticipate fundraising to be affected by coronavirus in 2021?

With recent vaccine breakthroughs, direct lenders are sanguine – only 9% expect coronavirus to have a significant negative impact on fundraising in 2021.

How much capital did your fund deploy across 2020?

Given the challenging conditions, 55% of managers deployed less than €300 million in 2020. According to our 2020 survey, only 25% deployed less than €300 million in 2019.

How do you think this is likely to change in 2021?

Survey respondents expect this to improve, as 69% believe fund deployment will build on 2020 figures.

Which region do you predict will offer the greatest opportunity for growth in 2021?

Direct lenders look favourably on DACH, with almost one-third (29%) identifying the region as offering the greatest opportunity for growth in 2021. UK/Ireland has fallen a few spots (to 16%) post-Brexit, after the region was projected in last year’s survey to lead the way in 2020 (29%).

How much leverage at fund level did you see direct lenders using in 2020?

Replies were split this year: 27% of respondents saw 0x leverage at fund level, while another 27% saw 0.5-1x leverage in 2020.

How do you think this is likely to change in 2021?

Following the 2020 survey, most respondents (64%) believe direct lenders will use the same amount of leverage in the year to come.

What was the leverage on your most highly levered deal in 2020?

More than one-third of respondents report that the leverage of their most highly levered deal was 6-7x, continuing the trend from last year’s survey where 25% of respondents agreed. That said, 31% of responses saw 4-5x leverage in 2020.

How do you think this is likely to change in 2021?

Most respondents (68%) expect leverage to remain unchanged from last year. This was also the case in 2020’s survey; however, few could have predicted such drastic changes in the market.

What has been the average level of opening covenant headroom for your deals during 2020?

Respondents were split on opening covenant headroom for deals in 2020: 39% saw 20-30% in their deals, while 36% saw a higher average level of 30-40%. This is a slight dip on last year’s survey, when 50% said 30-40% was their average level of opening covenant headroom.

Has this changed in the last 12 months?

Most survey respondents (69%) report no change to the average level of opening covenant headroom for their deals in the last year.

What was the average margin on the unitranche facilities you issued or advised on in 2020?

Nearly half of respondents (44%) had an average margin of 6.5-7.5% on unitranche facilities they issued or advised upon in 2020.

What proportion of your unitranche facilities issued during 2020 had a first loss/second loss structure?

A strong majority of respondents (81%) say that less than 20% of their 2020 unitranche facilities had a first loss/second loss structure. This is a major change from last year, when 46% of respondents said fewer than 40% of their unitranche facilities had a first loss/second loss structure.

How do you think this is likely to change in 2021?

Heading into the new year, most respondents (64%) do not expect to see a change in the proportion of unitranche facilities with a first loss/second loss structure.

What was the average cash margin on your deals during 2020?

Most respondents (61%) say the average cash margin on deals in 2020 fit into the 5-7% bracket, with 7-9% following as the next most popular answer (32%). No respondents saw average cash margins above 9%.

What percentage of companies in your portfolio have waived covenants or had a covenant holiday in 2020?

Almost all respondents (96%) claim to have had between 0-40% of companies in their portfolio waive covenants or have a covenant holiday in 2020. More than one-third (39%) say 11-20% of companies in their portfolio have waived covenants or had a covenant holiday in 2020.

What percentage of companies in your portfolio defaulted in 2020?

More than half (52%) of survey respondents saw less than 2% of companies in their portfolio default in 2020. Almost one-quarter (22%) were lucky enough not to suffer any defaults at all.

What has been the greatest challenge faced by the direct lending market as a result of coronavirus?

For nearly half of respondents (47%), portfolio management was the biggest coronavirus-related roadblock. 22% say the lack of face-to-face interaction was their largest hurdle that could have led to difficulties fundraising, as was the case for 19% of respondents.

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European Direct Lending Perspectives

Q4 2020

and our

2020 in review: When will direct lending’s real test begin?

The dust is still to settle