Lender Patience Wearing Thin

November 23, 2021
| Articles

Five Questions with Brian Williams

Partner, Carl Marks Advisors

Carl Marks Advisors conducted a survey of U.S. middle market financial trends. Respondents, which included financial services executives and advisors, believe that lenders may soon begin to act on loans to businesses that are underperforming or at risk of default. According to the survey results, revenue forecasting is likely to present a challenge well into 2022.

What did you hope to learn from this survey?

We work with a wide variety of banks and alternative lenders, financial sponsors, and advisors to middle market companies, and have noticed a shift in attitudes as the pandemic has progressed. Given a number of dynamics, including the end of the PPP loan program and other initiatives that supplied funds to keep companies afloat during COVID-19, we went in with the premise that the lender flexibility we have seen will end at some point. We felt this was a good time to pull up and check attitudes heading into 2022.

Can you elaborate on the measures that banks and non-bank lenders have taken to provide flexibility to borrowers during the pandemic?

We have seen widespread use of covenant waivers as companies and their lenders took a pause to see how the pandemic would shake out—essentially “kicking the can down the road.” Banks did not follow their historical precedent last year due to the liquidity support provided by the CARES Act, PPP loans, and forbearances.

That flexibility has been extremely successful in stemming the need for financial restructuring during the pandemic, but we are now moving into a new phase when lenders say they are likely to be less patient.

How do you expect to see lenders react as this shift continues?

A large majority of respondents to our survey believe that, by early 2022, much of the flexibility we have seen will be gone. While macro performance in most industries has recovered, there are lingering supply chain issues and labor shortages adding complexity to forecasting revenues and cash flows, and likely resulting in more difficult and contentious lender negotiations.

On a case-by-case basis, we expect banks to start taking a harder look at forecasts, resulting in an upswing in financial restructuring.

What kinds of tough decisions will companies need to make?

As a result of the pandemic, many companies revised their business models, and now they are navigating other challenges, including pricing changes, supply chain disruptions, and labor cost and availability issues. Communicating with lenders qualitatively and quantitatively about what the “new normal” looks like is the key for management teams.

Lenders will be more lenient if you give them accurate, timely updates and show that you have a good handle on your business outlook.

Our survey showed that 75% of respondents think inflation will persist for more than six months into 2022, and more than 40% think supply chain issues will still not be resolved by the end of 2021.

What should we expect for companies that continue to struggle?

For companies who are still struggling, we expect middle market lenders to make decisions in the early part of next year. Macroeconomic factors could also play a role.

Where there is supply chain disruption, lenders are getting engaged with companies now and figuring out how to treat that issue. Many will be forced to act and reopen the traditional financial restructuring playbook.

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