US Private Equity Mid-Market Monitor: Q3 2020 (1)

Restructuring

• YTD restructuring activity continues to be dominated by companies in the retail and consumer, energy, telecom and travel-related industries
• The leveraged loan default rate increased to 4.17% through the end of 3Q and up from YTD 2Q which ended at 3.23% as the third quarter saw 11 issuers default on $10.6 billion of loans [1]
• This is juxtaposed with a leveraged loan market, as measured by the S&P / LSTA leveraged loan market, that reached positive territory in September, for the first time since late March [2]
• The Federal Reserve’s initiatives bolstered the capital markets and were a key contributor to the recoveries in the high yield and leveraged loan market since February
• While the overall loan and high yield markets have recovered to pre-pandemic levels, a large number of issuers who entered into covenant amendments as a result of the pandemic will require renegotiation or extension of the covenant holidays by the summer of 2021
• As a result, we anticipate that restructuring activity will shift from 2020 into 2021 who have not yet seen a recovery in operations through their covenant holidays

Private Capital

• Similar to 1H 2020, over the last quarter we've seen a growing number of companies choosing to delay their pre-pandemic full exit strategies by a couple of years and pursuing a growth capital raise instead
• In our view, many of these capital raises will significantly increase valuations for these companies down the line, which would then offset dilution resulting from capital injections
• We anticipate that there will be an increase in fund raising in the coming months in areas that have been particularly active during the Covid-19 pandemic e.g. healthcare IT, supply chain and e-commerce
• For PE firms that need to access capital from LP’s to complete a transaction, a strong LP base is critical as co-investor dollars have been increasingly harder to access in this climate

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References

[1] US leveraged loan default rate expected to peak at 6.6% – LCD survey, S&P Global Market Intelligence, 1 October 2020

[2] US leveraged loan default rate expected to peak at 6.6% – LCD survey, S&P Global Market Intelligence, 1 October 2020