Leveraged lending has emerged as a boon for underperforming companies or entities in debt. Gone are the days when underperforming companies found all doors shut for funding. A company can secure loans even when its liabilities exceed the value of its assets. However, the company must show promise of improved cash flows in the future to reduce the associated credit risk. Corporate, investment, regional, and commercial banks involved in leveraged lending face several challenges. They also keep track of trends in the leveraged lending sector to stay ahead of the curve. Read on to understand the recent Trends in Leverage Lending.

Are You Familiar with the Concept of Leveraged Lending?

Before discussing the trends in 2023, it is essential to understand the concept of leveraged lending. Leveraged lending refers to the practice of offering loans or debts to companies in distress. These loans are offered to companies that are already in debt. Leveraged Buyouts (LBOs) also occur when companies acquire other entities with borrowed funds. Leveraged loans are riskier than traditional loans, as borrowers do not have a good credit score in the former. The future cash flows of the company or an asset are used as collateral in a leveraged loan. Besides banks, private equity firms and syndicates are involved in leveraged lending. Let us now understand how recent trends have changed the leveraged lending sector.

Top Leveraged Lending Trends in 2023

Leveraged lending has changed and evolved over the years. New lending techniques, technologies, and risk management methods have emerged. Here are the top Trends in Leverage Lending in 2023:

  • Risk of Syndicates

Financial institutions know the risks associated with leveraged lending. Many financial institutions are coming together to form a syndicate. When multiple banks are involved in a leveraged loan, the credit risk is spread among the members. Increased syndication has helped many lending institutions lower the risk level and enjoy returns.  

  • Outsourcing of Leveraged Lending Processes

Leveraged lending includes research, credit analysis, and other redundant processes. Financial institutions spend a fortune on different leveraged lending operations. Also, finding expert financial analysts and researchers is no easy task. It is where specialized third parties are helping lending institutions reduce their in-house costs. An outsourcing firm will have a dedicated team of financial experts to analyze and approve leveraged loan applications.

  • Use of Automated Covenant Monitoring Solutions

Leveraged loans are risky for financial institutions. Lenders often impose covenants, which are loan agreements. Covenants can obligate or restrict the user to perform some tasks. Lenders monitor the covenant quality throughout the loan tenure to make informed decisions. In the past few years, the use of automated covenant monitoring solutions has increased. These software solutions allow lenders to track covenant quality in real time.

  • Rise of ESG Debt Financing

Environmental, Social, and Governance (ESG) factors are considered by lenders for debt financing. Lenders now prefer to distribute leveraged loans to sustainable borrowers. Also, the coupon on the debt will decrease when the borrowing company meets pre-defined ESG performance targets. It is a win-win situation for lenders and borrowers in the leveraged finance sector. 

  • Change in Regulations

Excessive leveraged lending might lead to economic downturns, financial instability, market disruptions, and other hassles. Regulatory authorities understand the downsides of excessive leveraged lending in an economy. For the same rationale, leveraged lending regulations have become stricter in the past few years.

  • The rise of LBOs

LBOs (Leveraged Buyouts) had already gained attention in the 1980s and 1990s. However, there has been a significant rise in LBOs in the past few years. More companies are indulging in M&As, thus fuelling the demand for LBOs. Also, there has been a rise in private equity activity for LBOs.

  • The Rise of Alternative Lenders

Gone are the days when traditional banks and private equity firms were the only players in the leveraged lending sector. Private credit funds, peer-to-peer lending platforms, direct lenders, and other alternate lenders have arrived in the market.

Conclusion

Leveraged lending has increased due to business expansion, M&As, investor appetite, and other reasons. The rise of alternate lenders has increased the competition in the leveraged lending sector. Firms must follow the trends in leverage lending to stay competitive. Lending institutions can rely on Acuity Knowledge Partners for support with underwriting, credit monitoring, compliance, and other leveraged lending processes. Check the recent trends in leverage lending now!