The final quarter of 2009 saw encouraging signs of confidence returning across a broad spectrum of bank lending. The mild softening in pricing and the lengthening of tenors in the corporate market, a cluster of new leveraged buyouts at the end of 2009 and the re-entry of banks into the commercial property market (on a selective basis) all presage a more active banking market in 2010.
Corporate lending – There are signs of increasing confidence in the corporate lending market reflecting a slight softening of pricing, particularly on larger deals and the extension of tenors to four years in some instances. Lenders are also more willing to consider financing a new borrower where there has been a resilient track record through the recession and prospects are attractive. There are initial signs that banks are beginning to consider taking material underwriting positions; a key milestone in the return to a more normalised market.
Leveraged finance – 2009 was the quietest year for over a decade in the syndicated leveraged finance market. However, there was an uptick in activity in the fourth quarter and the pipeline for new deals is encouraging. Whilst the market is not about to accept a surge in highly leveraged, thinly priced deals, a gradual improvement in lending conditions is realistic.
Corporate Bonds - For larger borrowers, the bond market filled the vacuum left by the contracting bank sector in 2009 with UK issuance up 12% year on year. Investor appetite also helped put pressure on bank pricing for large corporate refinancings. More borrowers could consider tapping the capital markets to diversify their lending sources (as well as lock in longer term debt).
Property finance - The sector has been one of the worst hit by the credit crunch. Lenders have generally been supportive of overleveraged credits where the borrower continues to service its debts, but take more robust positions where there is a new money requirement, in some cases taking material equity positions. There are an increasing number of lenders offering debt for new deals, but the level of available leverage will leave a significant funding gap on those deals with upcoming bullet maturities, which suggests there will be a significant amount of restructuring activity in the next 2-3 years.
Restructurings - The second half of 2009 saw a reduction in the number of borrowers commencing formal restructurings. However, there will continue to be a steady stream of borrowers seeking a renegotiation of their debt facilities over the medium term. Quite apart from the anaemic macroeconomic backdrop, companies that were the subject of leveraged buyouts in 2005-2007 face tightening covenant levels over the next 18 months.