LONDON, April 17 (LPC) - Direct lenders are considering charging higher interest rates and fees to portfolio companies that tap emergency loans as part of the government Covid-19 bailout scheme.
The UK government has broadened its rescue package enabling companies with revenues more than £45m to borrow up to £50m of state-guaranteed loans, with the final details set to emerge soon.
However, direct lenders -- which are typically sole principle creditors to portfolio companies -- are concerned any additional outside funding will jeopardise how their debt ranking and increase their risk profile. A government-backed loan is expected to sit as super senior debt within a capital structure.
“A debt fund may not want to allow a third party to provide emergency liquidity support, which would be structured on a super senior basis. The more super senior debt that goes in to a company, the more subordinated the existing debt is,” Ropes and Gray partner, Malcolm Hitching said.
PRICE TO PAY
Despite that, a number of private debt funds are open to incremental debt incurrence to avoid business insolvency and some believe it’s better than debt funds putting in their own money in which is expensive from both capital and potential loss perspectives.
However, the portfolio companies might have a price to pay as private credit funds increase their rates to counter any debt subordination.
“Clearly, if there is a lot of super senior debt coming in, then we will probably increase the interest rates or charge more fee to compensate that,” said a head of origination at a private debt fund.
Any addition borrowings will need consent from direct lenders as documentation in the middle market has stricter rules on incremental debt than the broader syndicated leveraged loan market, lawyers said.
“There are going to be delicate negotiations between any new liquidity providers, the owners and existing debt stakeholders as any new money comes in,” Goodwin Procter partner, Simon Fulbrook said.
While capital intensive, some private equity firms might be happy to inject additional equity into a portfolio company and direct lenders may also be comfortable providing more debt to solve any liquidity shortfalls. However, determining the right credits in the right sectors will be key.
“Leverage will go up and covenants will need to be reset, but I think both owner and private debt funds will be happy to support and put more money to work if the underlying business is relevant in the post-covid world,” said Callum Bell, head of growth & leveraged finance at Investec.
“These are extraordinary times and some extraordinary equity and debt supply will be required for business liquidity to navigate the crisis.” (Editing by Claire Ruckin and Chistopher Mangham)