Churchill AM's Schwimmer: The Covid-19 crisis from a lender perspective
With the benefit of hindsight, we can see that the fund-raising environment remained strong in 2020, apart from the period when the market was in a state of shock at the beginning of the pandemic, and special situations platforms were able to raise new funds.
PEWire spoke to Randy Schwimmer, who heads up senior lending origination and capital markets at Nuveen affiliate Churchill Asset Management, to hear how he experienced the lending market throughout the crisis and how it keeps evolving into 2021.
Churchill AM is structured as a private equity firm and is headquartered in New York but works with clients globally, and provides structuring, credit analysis, equity, debt, and capital investment to middle market companies, primarily those owned by private equity investment firms. From Schwimmer's perspective, he noted that the period going into 2020 was tainted with a certain degree of apprehension.
“Having started the 2019 pre-Covid period as a very user-friendly market, we knew that there was some suspicion that there would be some kind of downturn. At the end of the first quarter in 2020, we saw a cessation of activity; both lenders and private equity sponsors were looking at their portfolios and were trying to figure out what would come next,” he said.
In fact, the Deloitte Alternative Lender Deal Tracker, published at the beginning of this month, reported a decrease of 29 percent in the number of direct lending deals in Europe in the first half of 2020.
In the second quarter of 2020 however, lenders had strong portfolios and few, if any, Covid issues, and began being more interested in lending money again, in Schwimmer's view. “In the middle of last year we started seeing a very lender-friendly environment, because there was still some uncertainty around Covid and the direction it was heading,” he explained.
Schwimmer continued: “That uncertainty led to low leverage lending and higher spreads, so it was actually a very good period for private credit. As always happens, when it looks the darkest is actually the best time to be investing.”
“As the year went on there was a pattern established where companies that were not affected by Covid - or in some cases benefited from it- did well and it was easy to finance those businesses. With the vaccines in place by the end of the year the market took on a ‘coast is clear mentality,’ that was echoed in public markets as well.”
The fourth quarter of 2020 proved to be the best Churchill Asset Management has had in terms of performance, which was echoed by a number of other private credit providers as private equity sponsors rushed to put money to work, according to Schwimmer.
“That really is the clue to what’s going on in the private credit market - it’s all about dry powder. The supply and demand dynamic doesn't really have anything to do with what’s going on with interest rates or inflation. It’s about putting money to work," he noted.
Indeed, despite political instability in the form of election uncertainty in the US and turbulence around Brexit in Europe, the end of 2020 saw the leveraged loan market rebound and new issuances continued steadily into 2021, as outlined in ICLG’s ‘Global Trends in Leveraged Lending: Lending and Secured Finance Laws and Regulations 2021.’
“We’re not quite back to where we were pre-Covid, but we’re still seeing plenty of equity below us as a senior debt lender. As a metric, we’re seeing almost 60 percent equity/cash to total capital going into new buyouts and that’s a record for senior debt providers, as well as private debt providers in general,” commented Schwimmer.