DACH lender sentiment continues to improve – survey

The survey was conducted via telephone interviews with 30 banks and 40 debt funds. The firm's previous surveys were conducted at the end of March, April and May 2020.

The vast majority of participants in the survey said they are now able to make primary commitments and present new projects to their credit or investment committees, with 91% of debt funds and 88% of banks agreeing with this statement. Just 21% of banks and 26% of debt funds agreed that they were able to do this in March.

Bank sentiment in this regard took slightly longer to recover than that of debt funds, although was still comparatively quick when compared with other crises, GCA managing director Norbert Schmitz tells Unquote: "The high yield and term loan B markets took three to four months, so this recovery was quite quick in comparison to other downturns."

Just 29% of banks said they were able to take on new business in April, compared with 65% of debt funds. In May, 57% of banks agreed that they were able to take on new financing projects, compared with 78% of debt funds. "What was remarkable was the development from March to May," Schmitz says. "There was not a massive amount of dealflow from June to August and we wanted to wait until after the summer to get a view for Q4. If we had done the survey in July, for example, I think the results would have been similarly positive."

Schmitz says that a slightly slower recovery on the part of banks was to be expected: "Debt funds were more confident earlier on to do new transactions, which is what we saw when it came to deals, too. The banks certainly took longer; in June they were still quite hesitant, but for deals in Germany, we already have proof of banks doing transactions. Banks simply have larger portfolios and they also had the KfW programme to deal with, which is fading away now."

Consistent leverage
The leverage offered by banks and debt funds was on the whole unchanged or up to 0.5x lower, according to the survey.

"We have seen that banks are perhaps a bit more conservative, but 42% of them saying it remains unchanged is quite a high number," says Schmitz. "In April and May, leverage was one or two turns lower. Leverage came back quickly for the quality assets. We have not seen leverage get higher though."

Schmitz also emphasises that EBITDA calculations are key in this equation and that it should be noted that these leverage terms are those offered for high-quality assets. "It's also key to work out what kind of EBITDA you take in a deal: the question is how to adjust for a Covid-19 impact. Some companies have seen a positive impact, some a negative one, so the final EBITDA you base it on is what you have to put in the equation for leverage."

Loan documentation was also a focus of the survey. The majority of both banks and debt funds (68% and 67% respectively) agreed or somewhat agreed that the language of new transactions is now stricter – more lender-friendly – than it was prior to the crisis.

However, many market players were expecting things to shift significantly, which has not been the case, says Schmitz. "At the beginning, people thought that documentation would go back five years, in favour of lenders. That has been proven wrong so far for quality assets. Parties have said they now try not to have unlimited exceptional items and they are taking a hard look at what a reasonable adjustment will be."

Resilience is king
Schmitz says financing deals for Covid-19-resilient assets is not likely to experience significant changes: "The people we spoke with said overall that documentation had not massively changed for the quality assets. If there is a competitive auction, for example, you won't have two covenants – people thought that documentation would go in that direction, but this did not prove to be right. If you have a competitive live deal, people get very commercial on these terms to win the deal in the end."

The survey also asked banks and debt funds about the importance of their existing relationships with private equity firms, as well as the behaviour of these sponsors. On a scale of one to 10, with 10 being the highest rating, banks gave an average rating of 7.4, versus 6.8 on the part of debt funds.

"What many of the debt funds said is that they start with the quality of the asset first – they are more open for a new PE relationship with a quality asset," explains Schmitz. "If it's not a good quality asset, they are unlikely to do it, in spite of the relationship. PE relationships have always been important, though. If you are a new Asia- or US-based fund without established links in Europe, it will still be more tricky – but if the asset is right, some lenders will start with the deal, then the relationship.

"It's a hard time for PE as quality assets are scarce, but many people are looking at them. It can help to have an established relationship to win the deal."

Asked about their outlook for Q4 based on the number of financing requests that they are receiving, 77% of banks agreed or somewhat agreed that Q4 would be set to offer many new financing opportunities, compared with 91% of debt funds. "The asset quality is key for the remainder of the year. And the questions about terms are really for quality assets," says Schmitz. "We don't know if it will be a great Q4 for closing deals, or if some might be pushed into Q1 2021. But the market will be more busy in terms of what people are working on."

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• Topics
• DACH
• Financing
• Germany
• GCA Altium