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Sponsor-lender relationship faces stiff Covid-19 test

GPs' relationships with their existing banks and debt funds became crucial to navigating challenging liquidity situations and potential covenant breaches in Q2, and will be even more important in managing the ongoing consequences of the crisis. Harriet Matthews reports

Debt funds have increased their market share of leveraged buyout deals in Europe prior to and during the coronavirus crisis, with sponsors often favouring their flexibility over bank financing. In Germany, for example, bank financing accounted for 29% of LBOs recorded in the period, while debt funds made up the remaining 71%, according to GCA Altium's Mid-Cap Monitor.

This shows a marked increase from H1 2020, when debt fund financing accounted for 52% of leveraged deals. However, the crisis has been a test for sponsor-lender relationships for both groups of lenders, with GPs particularly keen to see how the behaviour of debt funds could develop when times get tough.

Once the initial liquidity needs of their portfolios had been addressed, be it via additional liquidity injections or applications for state-backed financial support, the risk of covenant breaches was at the forefront of the minds of many lenders and sponsors.

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