During the pandemic, banks and alternative lenders have had a “kick the can” flexibility for mid-market companies looking to borrow, according to investment bank advisory group Carl Marks Advisors. But they are predicting that will soon change.
A survey conducted by the firm predicts that lenders will begin to act on loans made to underperforming companies regardless of the companies’ revenue struggles or even if there is a risk of default. Responders to the survey, who are financial services executives, advisers and investors believe that attitudes will change because of the constant struggle for companies to accurately forecast their revenue.
“Borrowers are having to roll up their sleeves and re-evaluate their business plans since financial perspectives are shifting permanently being this far into the effects of covid,” Brian Williams, a partner at Carl Marks Advisors, told Private Debt Investor.
According to the survey, 75 percent of respondents believe lenders will stop “kicking the can” on loans to mid-market companies by the first quarter of 2022 while only 38 percent believe revenue forecasting will “normalise” for those companies by then.
Williams says companies will have to rectify their loans and return to their toolbox to fix underperformance, whether that means re-evaluating business plans or not, while also not being able to use covid as an excuse via the CARES Act’s Paycheck Protection Program loans. But still, lenders won’t be as stringent as banks.
“Lenders will be somewhat understanding,” said Williams, of the lender/borrower relationship. “But companies have to be able to assess and communicate their business both qualitatively and quantitatively to lenders.”
Capital recovery for lenders is a noteworthy concern in the survey. Less than 13 percent of respondents said prospects are favourable for lenders to recover capital from mid-market companies in case of a default related to a retreating economy.
“Lenders have been more flexible than anyone expected over the past 18 months,” said Williams in the release. “However, our survey shows we are approaching a pivot point where bankers and lenders feel it’s time to begin addressing excess leverage levels and lenient loan terms with borrowers whose future prospects are unsteady or unpredictable.”
Carl Marks Advisors conducted the survey from 30 June to 16 July this year, receiving 125 responses from financial services executives, advisers and investors in the US.