U.S. Capital Advisory Group – Financing Market Update

Apr 2020

Private Credit Market Issues Amidst COVID-19

The current COVID-19 crisis is presenting numerous challenges for traditional middle market lenders.

	Aggressive Revolver Draws During the two weeks leading up to 3/31, many borrowers drew down on their revolvers; the unprecedented level of revolver draws caused a significant drain on lenders’ capital Many middle market lenders indicate that their aggregate revolving facilities are 70%+ drawn, compared to a normal-course average of ~20% and prior peaks of ~40% during the Financial Crisis of 2008

	Portfolio Underperformance Due to expected portfolio underperformance and forthcoming company liquidity concerns, lenders are preserving capital in anticipation of requests to support challenged borrowers Many more defaults are expected at 6/30, compared to 3/31, since the crisis began so close to the end of Q1

	Potential for Deferral of Interest and/or Principal Payments While 3/31 passed with fewer than expected interest and principal payment deferrals, the underlying issues did not disappear and will have to be addressed at 6/30 (or sooner) Lenders could face significantly higher interest and/or principal deferrals at 6/30, causing them to conserve liquidity

	Reduced Availability for Credit Funds As portfolio company underperformance weighs on the valuation of middle market loans when “marked-to-market,” lenders are expecting covenant defaults and/or reduced availability on fund-level credit lines due to shrinking borrowing bases, negatively impacting the funds’ liquidity Some lenders have already begun to pursue strategies to shore up liquidity (e.g. rights offerings)

These concurrent and systemic issues are leading to tightening liquidity across the private credit markets.

Although some traditional lenders are well-capitalized and will be able to deploy capital for new transactions, the market will continue to struggle in a number of areas.

Resulting Credit Market Activity

With a wide range of challenges facing traditional lenders, unconventional capital providers will drive a wave of private credit activity for the remainder of 2020.

Shorter-Term Remedies

Amendments and forbearances, either on a standalone basis or in conjunction with:
- Capital infusions*
- Bridges*
- Rescue financings*
- Fairness opinions

*Provided by sponsors, lenders, or third parties

Medium-Term Fixes

Restructurings
Lender-driven M&A
Structured capital solutions

Longer-Term Solutions

Refinancings
Dividend recapitalizations
Acquisition financings
Company sales

This surge of activity will bring a complex set of challenges that are the focus of Lincoln’s Capital Advisory Group.

Lincoln Has Expertise Across the Entire Capital Spectrum

Through its full-service platform, Lincoln maintains the capability to assist companies across the entire spectrum of capital needs.

Liability Management Forbearance Amendments / Waivers Maturity / Reporting Extensions Consent Solicitations Negotiating Capital Injections from Existing Stakeholders		Capital Raising Bridge / Rescue Financing Structured Capital Solutions Private Debt Alternatives Refinancings Growth Financing Acquisition Financing Dividend Recapitalizations

Liability Management

Forbearance
Amendments / Waivers
Maturity / Reporting Extensions
Consent Solicitations
Negotiating Capital Injections from Existing Stakeholders

Capital Raising

Bridge / Rescue Financing
Structured Capital Solutions
Private Debt Alternatives
Refinancings
Growth Financing
Acquisition Financing
Dividend Recapitalizations

Financial Restructuring Debt for Equity Exchange Chapter 11 Restructuring Out-of-Court Restructurings Strategic Alternatives Review Distressed Debt Buy-Back		Mergers & Acquisitions Sell-Side Advisory Buy-Side Advisory Distressed M&A 363 Asset Sales		Valuations & Opinions Portfolio Valuation Fairness Opinions Solvency Opinions

Financial Restructuring

Debt for Equity Exchange
Chapter 11 Restructuring
Out-of-Court Restructurings
Strategic Alternatives Review
Distressed Debt Buy-Back

Mergers & Acquisitions

Sell-Side Advisory
Buy-Side Advisory
Distressed M&A
363 Asset Sales

Valuations & Opinions

Portfolio Valuation
Fairness Opinions
Solvency Opinions

Lincoln can help sponsors and borrowers weather the storm while positioning them for long term success.

Lincoln Perspective

Lincoln’s Capital Advisory Group is uniquely qualified to guide clients through uncertain times and towards optimal outcomes.

Full Suite of Capabilities to Address All Borrower Needs

Capital Raising
Liability Management
Restructurings
M&A Advisory
Valuations & Opinions

Superior Track Record of Success

53 Deals Closed in the Past Three Years
Zero Hung Deals in the Past Three Years

Lockstep Collaboration Across the Lincoln Platform

Portfolio Valuation
Fairness Opinions
Solvency Opinions

Engaging Lincoln allows sponsors and companies to successfully navigate challenging market conditions and ensure the best possible outcome

Summary

Lincoln International's U.S. Capital Advisory Group discusses private credit market issues amidst COVID-19 and the resulting activity for the remainder of 2020.
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