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Coronavirus and leveraged lending

Posted by Max Blumenthal | Feb 28, 2020 7:45:00 AM
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The leveraged lending market may have finally met its match in the Coronavirus.

Everywhere we turn we see articles about how the Coronavirus is affecting markets. Today, I'd like to talk about how it's going to affect middle market corporate debt.

Over the last few years, companies have been allowed to take on more and more debt because of their increased earnings and a great economy. At the same time, increased competition amongst lenders has created this effect where there are fewer covenants attached to these deals. So today leverage ratios are about 4-5 times on these middle market leveraged loans. 

Interestingly, these leverage ratios are typically calculated on projected – future – EBITDA. 4-5 times for a leverage ratio is fairly high. But if you were to calculate the leverage ratio based on current EBITDA, the numbers would be closer to 6, 7, 8 times, which is insanely highly levered. 

Again, that's been OK in an up market, but the Coronavirus may affect these middle market companies just enough by disrupting their supply chain or, if they're selling to consumers in China, by disrupting their sales channels into not being able to meet their projected earnings.

Topics: perspectives, video

Written by Max Blumenthal

Co-Founder and CEO