While lenders are still working through plenty of 2020 problems with borrowers, there is appetite for new loans, according to Sanjeev Khemlani, a senior managing director who leads the Senior Lender Advisory practice at FTI Consulting.
“There’s a robust demand for credit product out there right now,” Khemlani says. “You can see that evidenced by the issuance in the leveraged loan and high-yield bond markets. It’s just on a tear and there’s so much demand that the yields have gotten compressed and the spreads on leveraged loans have come down just because there is more capital chasing returns.”
Khemlani says terms should become a little more borrower-friendly as opposed to credit investor-friendly. “But, from a cost of capital perspective, I think it’s also going to work in favor of the issuers, given that there is an enormous amount of capital that is looking to be put to work at the moment,” he says.
Respondents to FTI Consulting’s 2021 U.S. Loan Market Survey strongly believe that leveraged credit market conditions will remain favorable for large corporate borrowers with respect to cost, terms, lending standards and access to capital in 2021. However, a solid majority of respondents believe that refinancing and repricing activity will dominate leveraged lending in 2021.
On the lending side, Khemlani says that banks posted solid numbers in Q1 and are releasing credit reserves that they took last year in anticipation of significant losses.
“They probably took more provisions last year than they needed to,” Khemlani says. “No one knew exactly what COVID was going to bring.”
Khemlani doesn’t see a huge difference between bank lenders and non-bank lenders for origination.
“If you follow these markets closely, you’ll see that quite a bit of the risk retention is with the non-bank lender community,” Khemlani says. “The banks tend to hold on to the revolvers and the undrawn revolver commitments and the operating accounts. But the term loans are syndicated out to the non-bank market. Both sides are happy with the risk they take.”
With the economy opening back up, the risk should lessen in the future. “People feel like we’re on the precipice of restarting our economy and consumers are stimulated enough to help drive a significant turnaround,” Khemlani says. “Hopefully, it’s a positive economic climate, at least for the balance of this year, if not into next year.”
Still, there are trouble spots out there. Khemlani thinks people will be cautious around travel-related real estate companies, like hotels and energy-related companies going forward.
“I think they are going to go through each one of their tenants on a one-off basis to make sure that they weren’t missing risk,” Khemlani.
Even after the economy opens back up, Khemlani sees concerns in certain commercial real estate sectors.
“Clearly, retail has been traumatic to the commercial real estate sector,” Khemlani says. “So that’s something that they’ve been dealing with and they’re going to continue to deal with in that sector as you see more consolidation in that space and as consumers migrate to online shopping.”