CFO Insights: Tips for Navigating Today’s Leveraged Lending Environment

The middle market leveraged loan environment bounced back remarkably well in 2021, having returned to pre-pandemic levels by October. And the encouraging news is that leveraged loan experts expect continued growth and favorable terms for borrowers as the market remains hot. 

Focus Search Partners, a leading executive retained search firm and creator of The Focus Forum, a place for mid-market CFOs to gain access to cutting-edge professional and personal development topics,  opened Q4 2021 by hosting a webinar for the CFO group featuring in-depth analysis and insight from three veterans of the middle market leveraged lending industry who are at the top of their game! This rare access allowed CFOs to tap into the expertise of industry leaders who explored key topics dominating  many strategic growth conversations today, including: 

  • The breadth of available lending structures given the evolution of today’s lenders
  • The benefits and drawbacks of various lender-group compositions
  • The various aspects of a super-aggressive market, plus key strategies for accessing capital
  • Determining COVID (“normalized”) EBITDA in today’s market

As a leading CFO community, The Focus Forum creates unique opportunities, much like this webinar panel, for CFOs to build their networks, gain expertise, and stay ahead of industry trends! Don’t miss out on another CFO Forum event. Join the community here

It was our pleasure to host our webinar panelists: 

Ryan Golding, Managing Director of Sponsor Finance at Capital One: Ryan has 20+ years of leveraged finance experience focused on originating, structuring, executing and syndicating senior and junior secured debt. Currently, he works for Capital One’s Middle Market Sponsor Finance team primarily responsible for sourcing, developing, structuring, negotiating and closing direct lending opportunities with Tier 1 private equity sponsors and select middle market companies across a broad array of industries. 

David Kulakofsky, Managing Director of Private Credit at Morgan Stanley: David is a Managing Director of Morgan Stanley, a member of the executive team of the Private Credit platform of Morgan Stanley Investment Management (MSIM) and a member of the Investment Committee for the Direct Lending, Opportunistic Credit and Senior Loan strategies.

Adam Willis, Managing Director and Head of Healthcare at Madison Capitol: Adam heads Madison Capital Funding’s Healthcare team and is focused on new business origination. He is also a member of the firm’s Management Committee. Since joining the firm in 2010, Adam has led and closed the financings for numerous transactions across a range of sectors, including behavioral health, pharmaceuticals, healthcare services, HIT, and medical devices. 

With Focus Search Partners Managing Director Monica Foster serving as moderator, our panelists took a deep dive into multiple trends and factors that are impacting the current middle market leveraged lending environment. 

Below, we’ve outlined some of the key insights this team of experts explored during their presentation. 

U.S. leveraged loan issuance has reached record levels in October 2021

The panel opened the discussion by examining the latest S&P numbers on leveraged lending. On the day of the discussion, the S&P had just announced that U.S. leveraged loan issuance had already set a record at $505 billion, with more than two months left in the year. 

“That’s largely being driven by private equity activity, but when we actually break down those numbers and look at where the loan issuance has come from, the biggest growth is from dividend recaps,” Golding said. “Historically, it’s been driven by refinancings. So we’re looking at record-setting numbers this year, across multiple sectors, whether it’s private equity, CLO money, high-yield debt or leveraged debt. ”  

Adam Willis pointed out that a lot of the new issuance is driven by counter-cyclical markets, namely those that have been insulated from the broader impacts of COVID-19. For instance, 60% of the booming market is being driven by healthcare and computers and electronics—two industries that saw increased demand during the pandemic.  

Traditional cash flow debt products are shifting to new structures

As the presentation shifted to the ways middle market leveraged lending has changed in recent years, Willis pointed out the market’s move from traditional cash flow debt products to hybrid structures.

“Historically, you saw a lot of senior and junior debt capital structure. As the types of lenders increased and the aggressiveness of the market has expanded, you’re seeing a shift from senior and junior debt to more of the senior stretch and unitranche products,” Wilis said. 

The causes of this shift include not only the amount of money entering the middle market loan environment, but also the types of lenders entering the space. 

As Willis noted, banks have decreased their share of middle market loans since 1995, while non-bank financial lenders and specialty finance companies have experienced significant growth in the space. 

Golding, Willis, and Kulakofsky agreed that the flexibility of non-bank financial lenders and specialty fincos was a key part of their appeal within the middle market lending landscape. However, the panelists also agreed that there are pros and cons to choosing these alternative lenders over traditional banks.

Learn more about the pros and cons of different lender types by watching the full webinar today.

Banks and direct lenders’ hold size continue to increase

Using data provided by Refinitiv—a company that surveys middle market lenders—Willis explored data points showing how hold limits for middle market lenders have dramatically increased in recent years. The data revealed that over half of direct lenders can now hold over $100 million, while 44% of banks will hold over $75 million. 

This is a marked departure from the middle market lending environment of just two decades ago, and it’s contributing to the rise of unitranche and senior stretch structures. 

“Ryan, David, and I can speak to twenty years ago when we were doing this, back then if you had a $100 million deal, you would have to club it with four lenders,” Willis said. “You might have two banks and two finance companies. Now, with $100 million, private equity sponsors in the middle market are expecting one guy to do it. This is what’s driving the unitranche [and senior stretch] dynamic.” 

Golding agreed with Willis’s assessment. 

“Anybody that’s active in the middle market or is calling on private equity sponsors and financing leveraged buyouts has to have the unitranche solution,” Golding said. “I think that product is clearly relevant and here to stay.”

Kulakofsky also agreed. 

“I remember the first time we tried to put two lenders into a unitranche and it was incredibly complicated. Now, it’s the lion’s share of our firm’s deal flow,” he said.

Kulakofsky expanded on his point by exploring the shifts in how unitranches are done: 

“Historically, they all looked very similar to a document from a senior mezzanine deal, where it had the covenants of the senior deal. Nowadays, you’re seeing billion to two-billion unitranches done covenant-like. It’s taking the capital previously allocated to the syndicated loan market, and that capital has been moved to the money managers doing unitranche, and they’re doing [unitranches] on legal terms that don’t look all that different from a syndicated deal,” he said.

Market competition has led to issuer (borrower) friendly terms

At the end of the presentation, Willis, Golding, and Kulakofsky explored some of the credit agreement concepts currently entering the market:

  • Large, unfunded capital commitments (Delayed Draw Term Loans) with the ability to lever up
  • EBITDA definition (and the add-backs)
  • Ratio debt
  • Free and clear baskets
  • Restricted payment flexibility
  • Portability features
  • “Yank a bank” provisions
  • Restricted vs. unrestricted subsidiaries

“Right now, there’s so much capital in the market and they’re chasing so few deals, that you’re seeing a lot of these new terms,” Willis said. 

Golding agreed and pointed to the tight competition between lenders as a key driver of many of the favorable terms borrowers can expect when they pursue leveraged lending. 

“If you think about all these different terms and the creation of private equity and the abundance of debt, it’s a terrific time to be a lawyer, an investment banker or a CFO,” Golding said. 

Golding, Willis, and Kulakofsky closed out the presentation by providing attendees with their key strategies for accessing capital. See their full list of strategies by viewing the full webinar today.

This webinar was created by Focus Search Partners to help CFOs better understand and navigate the trends shaping the leveraged lending environment. To learn more about Focus Search Partners’ CFO solutions and resources, contact us today


Thanks to Ryan Golding, David Kulakovsky, and Adam Willis for providing their expertise and insight to our webinar attendees.