There are no deals – and no signs of it – in mid-market lending

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Midsize businesses decimated by the Covid-19 crisis may need cash soon – but deals have all but stopped.

“The market is closed; the M&A process is dead; Volume is at a level we haven’t seen since ’09, “said Ian Fowler, co-head of Barings’ Global Private Finance Group, at a client webinar on Thursday.

In the second quarter of 2020, syndicated loan issuance for small and medium-sized businesses reached $ 14.1 billion, slightly more than the $ 10 billion seen in the first quarter of 2009, according to data from finance and risk firm Refinitiv.

Fowler said business recovery could be well in the future. “It will take a long time. We haven’t seen opportunistic situations arise, ”he added.

Fowler said he would expect a number of secondary businesses in a crisis, including companies with battered balance sheets that need restructuring.

“We know that many companies have suffered and need liquidity. But people hide them in the portfolio. It’s because of the illiquid nature of our market and the recovery that has allowed them to kick the can, ”he said during the online forum entitled“ What to Expect When Facing Credit Stress. ”

The lack of opportunity has not stopped asset managers from raising large numbers of discard funds.

Jonathan Bock, Managing Director of Barings Global Private Finance Group and moderator of the webinar, said: “Much has been raised for free credit options, whether opportunistic”. [or] saddened. ”

[II Deep Dive: Barings’ Jonathan Bock Breaks His Silence. Investors Should Listen.]

Fran Beyers, Head of Middle Market Analysis at Refinitiv Financial Solutions, said, “As in 2009, there is no pipeline of meetings. My outlook for M&A is that we won’t see a normal M&A this year. ”By mid-2021, she expects better care.

“It’s still difficult for sponsors to do due diligence. Sponsors have to save money, and then there is the buyer-seller separation, ”said Beyers. “Nobody can agree on the price. Lenders don’t want anything Covid-iffy. They want Covid-Green companies that are either doing really well or having limited effects from Covid. “

Beyers added that everyone wants to invest in the same sectors as healthcare.

Bock pointed out that the data shared by Beyers suggests that lenders are fairly negative about the financial health of most of the companies in these portfolios, but are also irrationally optimistic about what they will recover from defaults.

“Both cannot be true,” he said.

“You can’t have that many issuers on a watch list and then expect above-average returns,” Beyers agreed.

Fowler added that midsize lending has changed since the last crisis, as managers with a wide range of expertise entered the business.

“In the mid-market with no liquidity and bilateral deals, the manager’s experience and access to capital will be critical to the results of these investments,” he said. “There are execution risks in midsize businesses and you need to think about managing the credit and possibly taking the keys and owning this business. There are players out there [that have] the research and capital to do it effectively – and other managers who don’t. “

When asked if he still views personal loans as defensive in the face of the challenges posed by Covid-19, Geoffrey Berg, chief investment officer of South Carolina Retirement System, said senior collateralized funds in the portfolio were focused on high quality during the discussion Securities that used modest leverage have held up well. “Some of our older legacies had problems. They were more opportunistic. ”

Berg stated that the asset class has done well for investors who understand the risks. “But we still have a long way to go,” he added.

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