Covenant breaches decline for third quarter in a row
Fewer private equity-backed companies are breaching covenants, according to Lincoln International, as borrowers and lenders proactively deal with any potential defaults through amendments.
The number of mid-market companies seeking amendments in 2023 was 740, almost 18 per cent of all companies that the investment bank values.
The number of amendments tripled over the course of 2023, from 6.4 per cent of firms in the fourth quarter of 2022.
Read more: Rising demand for maturity extensions and covenant holidays
Meanwhile, global covenant breaches decreased from 3.9 per cent in the third quarter of 2023 to 3.4 per cent in the fourth quarter, falling well below the peak of 9.4 per cent seen during Covid and down for the third quarter in a row. The investment bank said consumer is the sector facing the most breaches, at 8.9 per cent, more than double the fourth quarter of 2022.
“Covenant breaches declined for the third quarter in a row, and lenders continued to support borrowers with amendments, as well as PIK pricing to conserve cash,” commented Richard Olson, managing director of Lincoln International’s European valuations and opinions group.
In terms of amendments, the most common ones relate to pricing, followed by sponsor equity infusions, maturity extensions and covenant holidays, Lincoln found. The use of payment-in-kind increased to 60 per cent of amendments from 22 per cent in the third quarter.
Read more: Higher default rates loom for corporate direct lending
The investment bank also found that European mid-market companies continue to be financially robust. After analysing over 300 private equity-backed businesses, Lincoln said private credit fair values were broadly flat at 97.3 per cent in the fourth quarter. Meanwhile, credits in stress or distress remained steady at 2 per cent.
“In the fourth quarter, Europe’s private equity backed companies continued to perform well and delivered significantly better average revenue and EBITDA growth than businesses in the US,” Olson added.
“Transactions continued to get done for the small number of high-quality mid-market businesses put up for sale – in many cases with robust multiples – and debt has become more available both from credit funds and banks, with the limited number of new deals providing competitive tension on private credit pricing.”
Pricing in the upper middle market is heading below 600bps for the first time in two years, the study found, reflecting an expectation of increased competition for private credit funds from the broadly syndicated market in the coming months.
Read more: Private credit’s returns attract investors and asset managers alike
