Q1 2020 | COVID-19 Edition

Valuations & Opinions Group

Inside this Issue

With leverage covenant testing and expected declines in performance on the horizon, Q2 2020 will be a true test of company performance.

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Inside this Issue

Lincoln International observes declines in enterprise values and private credit instruments in the first quarter of 2020 with no safe haven industry.

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Importance of a LIBOR Floor

In the current interest rate environment, the presence of a LIBOR floor created a partial offset to a market spread widening. Conversely, the lack of a LIBOR floor magnified the impact of spread widening on fair value.
The LIBOR forward curve had declined to a long-term projection below 1.0%…
…leading to inferior cash flows to securities without a LIBOR floor…
…which had varying impacts on value based on the floor and term to maturity of the loan (default assumption for valuation comparison is a 5-year term with a 1.0% LIBOR floor).

Fair Value Declines Observed Across Private Loans

As prevailing loans spreads widened considerably, loan prices declined compared to the prior quarter.
Distribution of Loan Fair Value – Time Series
Distribution of Loan Fair Value – Quarterly Change

Loan Price Declines Across Industries

Fair value declines emerged across all industries, although industries such as Business Services, Healthcare, and Technology experienced more tempered declines compared to Consumer, Energy, and Industrials.
Fair Value Distribution by Industry

Loan Price Declines Across EBITDA Size Categories

While all company sizes saw a similar trend in loans valued below 95% of par, smaller companies showed a higher allocation to more distressed ranges of 0% to 50% of par and 50% to 80% of par.
Zero to $10.0 million of EBITDA
$10.0 million to $30.0 million of EBITDA
$30.0 million to $50.0 million of EBITDA
Greater than $50.0 million of EBITDA