Rising demand for maturity extensions and covenant holidays

A growing percentage of credit facilities are requiring maturity extensions, amid a challenging macroeconomic environment.

These have grown from 16 per cent of all amendments at the start of 2023 to 34 per cent as of the third quarter, according to Richard Olson, managing director of investment bank Lincoln International’s valuations and opinions team.

Meanwhile, covenant holidays have also made up around 16 per cent of amendments.

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What’s interesting has been the average times for the changes.

For example, in the first quarter of last year, most maturity extensions were for around 16 months. Now they are closer to 24 months, which Olson says, “should help borrowers get well past their worst-case scenarios for peak interest rates”.

And covenant holidays were previously granted for roughly one year, which has since decreased to seven months on average, meaning that private credit lenders are keeping a tight rein on borrowers.

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The number of European companies in stress, measured as 80 per cent of par value, has increased from 1.3 per cent in the first quarter of 2022 to roughly four per cent in the third quarter, according to Lincoln International. While Olson says the level of stress could increase, there hasn’t been much movement for four to five straight quarters with higher base rates.

“The financial performance of private companies Lincoln reviewed remained broadly strong,” he added. “That said, every additional quarter we’re in with elevated base rates and higher inflation gives rise to the potential that costs, both in terms of interest rates and variable costs like labour and energy, will outstrip companies’ ability to produce sufficient cash flows to service debt.”

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