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US leveraged finance: The road ahead

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What will drive issuance in a post-COVID-19 world?


Halfway through 2021, we take stock of leveraged finance in the United States and consider the road ahead for both borrowers and lenders. After more than a year of COVID-19, are things returning to normal? Or are we just starting a whole new journey?

In many ways, COVID-19 had far less of an impact on leveraged finance markets than expected. Activity dropped in the second quarter of 2020, primarily in leveraged loan issuance, but a year later numbers returned to pre-pandemic levels. In fact, leveraged loan and high yield bond values reached record highs by the end of Q1 2021—the highest quarter since Q2 2018 and the second-highest quarter, respectively, on Debtwire Par record going back to 2015.

What drove this relatively high-speed recovery? First, the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, protected many businesses from the full brunt of the pandemic. At the same time, many businesses shored up their finances, taking on debt to ensure liquidity as lockdown measures continued to have an impact through the second half of 2020. Issuances rose and that upward trajectory carried on into 2021.

By the end of Q1 2021, the picture had changed once again. Vaccines were being distributed quickly and efficiently, raising hopes for a post-COVID-19 future. The economy was also improving, as various states began to open up and a year of pent-up consumer demand was released. By May, core retail sales in the US had reached levels typically only seen over the Christmas period, according to the National Retail Federation. An air of optimism crept into the market, with lenders increasingly willing to take more risks on borrowers in their pursuit of yield. Financing earmarked for M&A and buyout activity also began to climb, hinting at growth plans for the months ahead. Perhaps most significantly, the low interest rate environment gave businesses an opportunity to reprice and refinance their maturing debt in droves.

What's next for 2021?

While these are all very positive signs for lenders in the leveraged finance space, there are still a few red flags on the horizon. First is inflation—in July, the Bureau of Labor Statistics reported that the US consumer price index had climbed 5.4 percent in the 12 months to June, a level not seen in 13 years. These growing inflationary pressures are part of the rush to reprice and refinance existing debt, as businesses try to avoid any unpleasant surprises if interest rates begin to climb as well.

Second, companies in robust sectors that enjoyed a degree of preferential treatment from lenders during the pandemic may find that sentiment shifting in the months ahead as other sectors begin to recover. The "flight to quality" witnessed in the early days of the pandemic will likely return to a more evenly balanced state of affairs. Documentation may also go through some changes in the coming months, as adjustments brought in during COVID-19 are phased out.

Finally, as the dust settles in debt markets, issues that were gaining ground before the pandemic will return in force, especially environmental, social and governance factors, which continue to take on increasing importance among borrowers and lenders alike.

All of which means the road ahead is not quite as clear as many would like, but there will be fewer obstacles blocking the path.

The US leveraged finance story so far

  • Leveraged loan issuance reached US$763.5 billion in the first half of 2021, up 60 percent from US$478.1 billion in the same period in 2020
  • High yield bond market issuance also rose 22 percent year-on-year, from US$219.6 billion to US$267.1 billion
  • Refinancings and repricing deals accounted for 62 percent of overall loan issuance in H1 2021
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From closing loopholes to rising inflation: Five trends that will drive leveraged finance

  • Leveraged loan and high yield bond markets shrugged off COVID-19 uncertainty to post year-on-year increases in issuance in 2021
  • Features of documents through the COVID-19 period—such as liquidity covenants and EBITDAC metrics—are fading from the market
  • Lenders are increasingly sensitive to the risk of subordination in either right of payment or lien priority
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Fund finance: New ways to harness NAV finance

  • Anecdotal evidence points to a surge in uptake of net asset value finance over the past 12 to 18 months
  • NAV finance is useful for the prevailing longer PE holding periods, which climbed from 3.8 years in 2010 to 5.4 years in 2020
  • Deloitte estimates that the average loan-to-value ratios for NAV facilities sit in the 25% to 30% range
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Downgrades, defaults, distressed debt and refinancing

  • Refinancing and repricing in US leveraged loan markets surged to US$471.7 billion over the first six months of 2021
  • US high yield bond refinancing accounted for 70 percent of total high yield issuance
  • Amend-and-extend deals give borrowers further breathing room
  • The extension of maturities has reduced near-term risk of default and limited the number of borrowers running out of cash and facing bankruptcy
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A more sustainable approach to debt financing

  • Global green bond issuance reached US$305.3 billion in 2020, according to Bloomberg data
  • Ratings agency Standard & Poor's forecasts that global issuance of sustainability-linked debt instruments will exceed US$200 billion in 2021
  • President Biden has pledged to cut US carbon emissions to at least 50 percent below 2005 levels by 2030, advancing the ESG agenda
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Ongoing SPAC surge reshapes capital structures

  • 248 SPACs listed in 2020, raising US$82.6 billion—a more than six-fold rise on 2019 issuance
  • 362 SPAC vehicles raised US$110.2 billion in H1 2021
  • 176 M&A deals worth more than US$386.1 billion have been completed via SPACs in H1 2021
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How distressed companies are avoiding full-blown bankruptcies

  • Announced US corporate bankruptcies climbed to 630 cases in 2020, according to Standard & Poor's—up from 2019 levels, but still lower than expected
  • Bankruptcies ticked higher early in 2021—from 14 cases in January to 23 cases in March, before dropping to 11 in June—but are still well below 2020 levels according to Debtwire Par
  • Covenant relief and uptiering, as well as drop down deals and other liability management structures have offered companies a variety of levers to pull to avoid entering bankruptcy situations
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Energy transition: Financing the race to net zero

  • Green bond issuance climbed 13% in 2020, to US$305.3 billion
  • Global energy investment will have to increase more than three fold to US$5 trillion by 2030 if net-zero carbon emissions are to be achieved by 2050
  • At the start of 2021, renewables accounted for more than 20 percent of total energy generation capacity in the US, surpassing the use of coal
Wind turbine with flower field

Direct lending in the US post-COVID-19

  • North American private debt fundraising increased by 15.8 percent in 2020 despite falling fundraising in other jurisdictions
  • The private debt default rate never rose above 2 percent in 2020 and was lower than high yield bond and leveraged loan default rates
  • Current private debt yields of 7 percent are outpacing high yield bonds and leveraged loans
100 US dollar banknotes scattered


Refinancing, repricing, M&A and buyout activity all surged in the early months of 2021, but then lenders shifted gears in pursuit of yield and borrowers realized they could tap the market for more than just liquidity. Where will this fork in the road lead for the rest of 2021?

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Fund finance: Harnessing NAV finance in new ways

5 min read


  • Anecdotal evidence points to a surge in uptake of net asset value finance over the past 12 to 18 months
  • NAV finance is useful for the prevailing longer PE holding periods, which climbed from 3.8 years in 2010 to 5.4 years in 2020
  • Deloitte estimates that the average loan-to-value ratios for NAV facilities sit in the 25% to 30% range

Demand for net asset value (NAV) finance—where private equity (PE) firms raise borrowings against the NAV of the assets in their funds—is on the rise. NAV finance is still a relatively esoteric, industry-specific product, and authoritative data tracking the market’s size and rate of expansion is scarce, but anecdotal evidence points to a surge in uptake over the past 12 to 18 months.

COVID-19 served as the catalyst for rising NAV finance demand, as managers explored alternative sources of cash. The need for additional liquidity came as exits were put on hold in the immediate aftermath of lockdowns, and managers moved to raise additional capital to see their portfolio companies through market volatility.

Even though capital markets and exit activity have now largely stabilized, PE appetite for NAV facilities is ongoing and the market has seen an influx of new lenders with NAV offerings to meet the new baseline of demand.

The average holding period in PE in 2020, up from 3.8 years
in 2010


Evolving NAV finance usage

As this uptake of NAV finance has increased, PE managers have begun exploring ways to use the product beyond servicing the immediate liquidity needs of portfolio companies.

NAV finance has proven especially helpful for managers that want to hold on to prized assets for longer. According to recent research from eFront, the alternative assets software group owned by BlackRock, average holding periods in PE climbed from 3.8 years in 2010 to 5.4 years in 2020.

The study also found that longer hold periods predict higher returns. According to the software group, on average, multiples on invested capital (gross of fees) came in at less than 2x for portfolio companies held for less than two years, but improved to around 2.5x after a five-year hold, and around 2.6x for deals held for between nine and 10 years.

NAV finance also allows managers to make distributions to their investors without having to sell crown jewel portfolio companies.

Investors stand to benefit too. Deloitte estimates that the average loan-to-value ratios for NAV facilities sit in the 25 percent to 30 percent range, so when used for limited partner (LP) distributions pre-exit, investors can receive a significant slice of value earlier in a hold period, which in turn enhances their internal rates of return.


Back-levering deals with NAV facilities

Managers are also starting to use NAV facilities to add in an additional layer of leverage to deals immediately following acquisitions.

Managers are effectively back-levering transactions at the fund level by putting NAV facilities in place as, or just after, the acquisition of a portfolio company closes. This means that, in addition to the borrowing done at the portfolio company level, the manager is also borrowing with NAV finance at the fund level.

The back-levered NAV facility has no direct credit support from the portfolio company but increases the leverage on the overall underlying transaction, as the sponsor is essentially financing part of their equity contribution.

For example, if a deal structure for a portfolio company requires a 40 percent equity contribution, the sponsor can pay for that equity contribution by only putting in 10 percent equity from the fund, with 30 percent coming from a loan facility up the chain on a back-levering basis.

General partner (GP)-led fund restructurings—where managers transfer assets held in an existing fund that is approaching the end of its term into a new vehicle—have also seen NAV facilities increasingly used in this way. Historically, fund restructurings would have been initiated by limited partner investors but, in recent years, GPs have proactively initiated restructuring deals to offer investors an opportunity to either roll their stakes over into a new vehicle set up by the GP, or take liquidity.

GP-led deals are typically funded by secondaries (investors who buy and sell fund stakes in PE funds). In a GP-led scenario, secondaries will buy out incumbent investors to facilitate the transfer of assets to a new vehicle, and then provide additional follow-on funding for the new fund structure. To ensure that they hit their return metrics, secondaries will often put an NAV facility in place to back-lever their equity commitments to the follow-on fund.

As the volume of GP-led deals increases (according to fund adviser Triago, GP-led deals accounted for the majority of secondaries deals for the first time in 2020) more deal flow is anticipated for NAV finance providers.


On the margin

Back-levered NAV loan structures have come to resemble those used for margin loans—interest-bearing loans that allow borrowers to lend against the value of securities they already own. What NAV lenders and borrowers are grappling with, however, is how to price the underlying assets in an NAV facility.

Margin loans are secured against liquid securities like equities or bonds, for which daily prices are quoted on public markets. In the event of default, the collateral securities can be sold easily on listed exchanges to reimburse lenders.

Privately owned assets that serve as security for NAV facilities, however, are usually illiquid and do not have easily identifiable reference securities that can be looked to for daily pricing. This poses interesting questions around how to track compliance with NAV facility loan-to-value ratios.

This is a developing area in the NAV finance space, as stakeholders determine how to use margin loan frameworks in a private market context. In some cases, borrowers and lenders will try to create a synthetic reference security linked to the listed bonds (if there are any) of the underlying portfolio companies. In other scenarios, lenders will require lower loan-to-value advance rates and higher pricing to account for the added risk.

There are no cookie-cutter solutions, with lenders and borrowers taking a bespoke, innovative approach in what is still a developing and rapidly changing market.



White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.

This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

© 2021 White & Case LLP


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