It shouldn’t come as a shock that COVID drove most of the workout activity in 2020.
Fifty-two percent of respondents to FTI Consulting’s 2021 US Loan Market Survey said that loans actively managed by their workout groups were driven by COVID-19 effects.
That was more than double the number of any other attributable cause.
“For the most part, COVID was the big driver of workout activity last year,” says Sanjeev Khemlani, a senior managing director who leads the Senior Lender Advisory practice at FTI Consulting. “But it wasn’t completely solved and done and dealt with.” Eighty-five percent of respondents think that the temporary covenant waivers provided to borrowers in 2020 due to COVID-19 will have to be extended in 2021. While defaults should drop in 2021, 40% of respondents anticipate that loans monitored by their workout groups will increase this year.
Only 25% percent of respondents expect loan default and workout activity to be sharply lower this year. While Khemlani predicts that there will be a continuation of dealing with COVID-related problems with workouts, many of FTI’s clients did not forecast a sharp decline in workout activity for 2021. “That, to me, was a little surprising,” he says.
Most companies surveyed still expect workout activity to be robust or above average in 2021.
“Some of those [loans] have continued to be worked on actively over the last year while others got covenant relief,” Khemlani says. “That covenant relief will run out sometime in the middle of 2021.”
The question is what will the economy look like then. Less than a majority of respondents (41%) expect real GDP to grow more than 4%. Seventy percent said that the effects of Federal Reserve policy actions and benign credit market conditions will dampen default and restructuring activity for up to one year.
“Are these corporate issuers’ feedback in line with the covenant package that they had before them,” Khemlani says. “That’s going to require growth in EBITDA, but it’s also going to require some debt reduction. A bunch of these companies took on some rescue financing to extend their liquidity runways last year.”
Ultimately, that just adds to their debt burden. “When you add to the debt load, that means EBIDTA has to go up as well to keep your leverage ratios in the right spot,” Khemlani says. “We’ll see whether that happens or not.”
Most survey respondents seemed cautious about the future. Forty-nine percent believe that most Americans won’t begin to return to pre-COVID lifestyles before the first quarter of 2022. Almost half of the respondents, 47%, expect that most Americans will choose to live differently than they did pre-COVID. FTI noted that bank lenders were notably more likely to believe that than non-bank lenders.
But even when things return to normal, another significant event could upend the economy. More than half of respondents, 58%, expect another Black Swan event within five years. Almost one-third predict that this event will occur within three years.