Kris Ring, debt finance equity partner at Goodwin Procter in Santa Monica, on the relationship between PE firms and direct lenders during the pandemic, the ways this downturn has been different to previous downturns, how the upcoming election will impact business in the US, and what a potentially contested election result could mean for market volatility.
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Kris Ring (pictured, left) is a debt finance equity partner at Goodwin Procter LLP in the law firm’s Santa Monica office, focusing on corporate finance. He represents private equity groups, as well as hedge funds, public and private companies and other financial institutions. Ring’s practice includes LBOs, cross-border transactions, dividend recapitalisations, workouts and restructurings, special situation financings, and subscription facilities. |
Here he shares his views on the relationship between PE firms and direct lenders during the pandemic, the ways this downturn has been different to previous downturns, how the upcoming election will impact business in the US, and what a potentially contested election result could mean for market volatility.
What has been your main focus during the pandemic and how has it changed throughout?
In the beginning, there was a focus on re-evaluating valuations of companies and understanding where they were headed, what they were going to do, and determining what sectors and industries were going to be resilient through the pandemic.
Also, there was considerable focus on examining existing credit facilities of current portfolio companies of PE firms and making sure that they had sufficient runway with respect to financial covenants, and the liquidity to get through any period of uncertainty. As that went on, people started to see which industries were going to be resilient and how to be able to issue new financings and refinancings under the current state of affairs where diligence, marketing and syndication approaches had much less in-person involvement.
Then, the financing market started opening back up, particularly in the second half of August and the first half of September, which was assisted by the fact that, unlike prior downturns, you had many additional direct lenders and sophisticated parties sitting on larger amounts of dry powder that wanted to put money to use, especially in situations where they were able to get higher pricing to go along with it.
What’s your outlook for Q3 and Q4 in terms of deal flow?
We already have deals in process and others in the pipeline for Q4. Some of those deals have been accelerated due to the uncertainty surrounding the election. As we see in certain industries like tech, life sciences, and business services; those types of industries will continue to present strong options for acquisition and the financing to go along with them; however, the uncertainty with respect to the election is causing some of the syndicated financings to be less prevalent in the market than what we saw in the second half of August and the first half of September with more financings as we head further into October being in the form of club deals.
So regardless of what happens as we move forward, particularly with respect to the pandemic, you’ll still continue to see those companies being put forward, albeit possibly utilising different approaches on the financing side than what was historically used. We expect the rest of Q4 to be pretty robust with deal flow, with some potential choppiness in and around the election.
How do you view the evolution of PE?
Lenders are learning more about the types of companies and industries that are resilient in downturns, and I think that PE firms will continue to focus on finding those types of companies. The one thing to note here is that this downturn is like no other; it couldn’t be predicted, and it came on quickly and strongly, which was predicated in large part on the many government shelter-at-home orders.
I think another key takeaway from this downturn is that many of the direct lenders, who make up a large portion of the lending market, gave PE-backed companies more rope, leniency and runway than in past downturns when you had more traditional bank lenders.
Many PE firms leaned heavily on their relationships with direct lenders, and direct lenders were willing to work collaboratively and pragmatically with PE firms knowing that this type of situation could not have been predicted and wanting to stay on the good side of PE firms for future deal flow. At the end of the day, the lending market is very relationship-based, and I think you will continue to see that going forward.
How has the pandemic affected your own firm?
I think everyone went through a slower period right when the pandemic first hit the US, but things picked up fairly fast and they’ve continued to pick up. We’ve tried to make the best of the situation. I think one of several factors that have helped us to weather the downturn fairly well is our representation of a large amount of tech, life science and business services type companies, which have been some of the main companies fuelling the market during the downturn. Our outlook for the rest of the year looks positive barring any unforeseen circumstances.
What’s your view on how the upcoming election will impact business and the increasing concerns of a contested election outcome?
Some of that is already being seen. Congress has been unable to agree on an additional stimulus package. The prolonged effect of not having an additional government stimulus package be made available to companies is causing certain companies in certain industries start to reach the end of their liquidity runway.
To add insult to injury, one of the existing government loan programs that was supposed to be available to middle-market companies in need, the Main Street Lending Program, has been largely inaccessible to many companies for a host of reasons that the Federal Reserve has known about for quite some time and without the Federal Reserve making material modifications to fix the inaccessibility problems. In addition, the uncertainty surrounding the election is leading to additional flex being included in commitment papers for certain syndicated loan deals, which helps provide the arrangers with additional protections to address some of the concerns with the election outcome.
If there’s a contested election outcome, it may cause uncertainty for businesses and could lead to volatility in the marketplace. Each industry is likely to be affected differently. The loan market, especially the syndicated and secondary loan market, typically moves with the stock market, so if there is any turmoil surrounding the election that sends ripples through the stock market, it could lead to a slowdown or halt in the syndicated loan market. I think people are trying to build in appropriate protections to address concerns surrounding the election and also, where possible, pushing deals to get done by the election. Nonetheless, people are eager to do business and to do deals. There was a time when they weren’t. Going through the pandemic has taught people about unpredictability and that you can never be certain.
