UK - PwC: lenders will become sponsors

PwC claims that most banks are currently attempting to reduce lending levels by up to 2x EBITDA on their current loan portfolio. With many businesses currently facing reduced profits in the midst of an econony in recession, the firm claims that there will subsequently be a significant funding gap, with businesses leveraged at the height of the buyout boom facing the prospect that their enterprise value will drop below the value of their senior debt, with mezzanine and other junior debt wiped out.

In the normal course of events a breach of covenent would eventually take place, which would then trigger the start of an insolvency procedure or restructuring. The bank would then enter pre-pack administration and the business would be sold. But with lending levels from banks restricted, no potential buyers of a business will be able to reach an enterprise value that would enable a successful administration to be completed (measured by full recovery of senior debt). Therefore banks, under pressure to realise value, will be forced into keeping the company and the management, leaving the maximum level of debt that they can on the company's balance sheet and converting the remainder into equity.

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