As the coronavirus (COVID-19) pandemic continues to unfold, Alan Booth - Head of UK, Abigail Holladay - Director and Ashley Kingham - Senior Manager, highlight the potential implications on the capital markets and the crucial role of a corporate trustee in helping to mitigate distressed situations.
It is unclear just how severe the impact COVID-19 will have on the debt capital markets. At the time of writing, the global economic landscape is bleak and saturated with profit warnings and overleveraged companies. Plagued by uncertainty and a dramatic rise in borrowing costs, many markets, like their citizens, are effectively in lockdown. Cash flows, revenues and supply chains are all spiralling under current conditions, with some sentiment that years of cheap lending will compound the threat of a global recession.
From a capital markets perspective, with historic levels of corporate debt totalling $13.5 trillion at the end of 2019 (a figure that excludes financial institutions) the prospect of a prolonged period of revenue interruption and impending bond rollovers for the new financial year look set to challenge debt issuers and originators. The prevailing focus is shoring up cash on balance sheets, with many tier-1/blue chip players drawing down on existing facilities and smaller players forced into the loan market at significant rate premium. In the era of 'cheap money', many companies are likely to find themselves overleveraged, unable to meet their financial obligations under their trust deeds and any applicable ratings requirements.
Fog yet to clear on securitisation market
It is too early to fully gauge the impact of COVID-19 on the securitisation market but the industry will be carefully monitoring underlying assets and the impact COVID-19 has on cash flows. Some securitisations may be able absorb the impact of short-term stresses due to their structural features. In the European Residential Mortgage-Backed Securities market for example, countries such as the UK, Spain and Italy have enacted repayment holidays and mortgage loan payment moratoria.
Commenting on the structured finance landscape, our Regional Head of Americas and Global Capital Markets Service Line Leader, James Maitland said: "The structured capital markets are expected to be impacted more progressively as underlying assets become distressed and/or default. The structured credit (CLO) market on the other hand, continues to demonstrate its ability to pivot quickly, with a number of investment managers already shifting strategic focus on distressed opportunities to capitalise on the current levels of volatility and uncertainty."
COVID-19 and "force majeure"
In times of financial difficulty, the provisions under capital markets documentation are put to the test. The need for an experienced and responsive corporate trustee is key to the navigation of complex legal documentation and the delivery of pragmatic outcomes. Where companies are scrambling for liquidity and the impact of further borrowing strains compliance with existing financial covenants, issuers may be giving careful thought as to whether COVID-19 triggers "force majeure" clauses or invokes 'material adverse effect' clauses. Concerned parties may also reach out to their trustees for potential waivers, amendments and consents. Corporate trustees will need to demonstrate an efficient, commercial solution while recognising, isolating and minimising risk through a strong partnership with their legal advisers.
Independent security and facility agents will be key
In the syndicated lending market, we expect to see an increased preference for an independent party to act as agent on any loan facility, and equally to hold any security which backs the finance arrangements rather than have this role carried out by a party who is a lender on the transaction. In an environment where different facility participants may have diverging interests on whether to accelerate or enforce, an independent facility and security agent can provide assurance of neutrality to parties to a syndicated lending arrangement in times of difficulty.
Specialists in restructuring
At Ocorian, we are actively looking at ways in which COVID-19 is having an impact on the debt capital markets, in particular debt restructuring and corporate insolvency. Our team of corporate trustee experts have years of market experience in securitisations, complex restructurings, defaults and downgrades. We would welcome further discussion with you on how COVID-19 is affecting your business while we are happy to share our commercial and practical experience.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
