Insights

Markets followed up an extraordinary end to 2020 with another strong quarter to kick off 2021. M&A activity led the way for sponsor-backed deals. All told, the market remains in borrowers’ favor, with limited signs of pushback from eager investors.

The retail industry has been in flux for the last several years as consumers continue to shift their purchases online. This trend clearly accelerated during 2020 due to the COVID-19 pandemic.

Pace of credit issuance surged from 0 to 60 in a matter of weeks, driven in large part by frenzied M&A activity. A combination of factors contributed to record levels of M&A activity in 2020’s final three months, including relaunching of delayed sell-side processes, sponsors eager to deploy dry powder, and founder/ owners seeking to equitize in anticipation of potential tax code changes. All told, Q4 2020 produced the highest quarterly M&A value since Q4 2015.

Momentum in credit issuance has picked up as financial markets have stabilized, and both borrowers and lenders have adjusted to a new normal in the pandemic age. This adjustment was evident between the “tale of two quarters” experienced before and after Labor Day, as borrower cautiousness in seeking capital at the beginning of the quarter eventually gave way to the typical rush to complete deals by year-end.

The coronavirus pandemic froze activity until a surge of government stimulus and rising confidence began to thaw middle-market issuance. Contrary to the pre-COVID supply/demand imbalance in favor of sponsors and borrowers, the crisis has turned the tables and is testing relationships between borrowers and lenders.

In just weeks, management teams at many Tier 1 and Tier 2 suppliers have developed extensive contingency plans to cope with COVID-19 positive employees. Most now consider themselves well-prepared.

Borrowers should approach negotiations with their lenders with both a defined request and plan of action in order to reach a mutual agreement and ensure ongoing partnership.