This week, in Today’s ViewPoint, MarshBerry takes a look back at three articles from a year ago to determine if predictions were on point.
This week, in Today’s ViewPoint, MarshBerry takes a look back at three articles from a year ago to determine if predictions were on point.
The first article in the series looks back at: The Debt Markets – A Moving Target.
Like the rest of the capital markets there was uncertainty around the availability of debt at the beginning of the pandemic. Would interest rates go negative? How would the new work-from-home (WFH) environment impact operations? Not only did lenders continue to honor their commitments and remain open for business, but we witnessed a record amount of debt raised by insurance brokers in 2020, to the tune of more than $18 billion, according to Pitchbook. So, the prediction 12 months ago that lenders would remain open for business to insurance brokers during the pandemic was correct.
Equity markets recovered to pre-pandemic levels by mid-November (approximately nine months) and have continued an upward trend with the Dow Jones Industrial Average (DJIA) reaching record levels last week. For insurance brokers, the smooth transition to a WFH environment did not raise many concerns in terms of the additional risk lenders would be facing. Interest rates did not go negative but have remained at historically low levels. This prompted many borrowers to refinance existing debt at better rates or clear their revolvers (i.e. Lines of Credit) into amortizing debt facilities resulting in “dry powder” for acquisitions.
At the beginning of the pandemic, there was a dramatic increase in the high yield spread, peaking at 10.9% in March of 2020. Similar to the decline and recovery in the stock market, the high yield spread returned to pre-pandemic levels by year-end 2020. It is often said the high yield debt market is the first to freeze and last to thaw when a financial crisis strikes.
Twelve months ago, a lender’s willingness to fund dividend recaps with new debt seemed highly unlikely. However, as recently as Q3 and Q4 of 2020 a few private equity-backed brokers raised new debt to fund distributions and repurchase equity, including Hub International Limited, Alliant Insurance Services, Inc., and AmWins, Inc. (according to Moody’s). Either way, most of the new debt issuances in 2020 have been initiated for the purposes of merger & acquisition activity including some “covenant lite” terms with cash flow coverage and leverage requirements within pre-pandemic levels.
Lenders consider loans to insurance brokers as “cash flow” deals compared to an Asset-Based Lending (ABL) program or Commercial & Industrial (C&I) lending for industries such as manufacturing, transportation, or construction. If an asset-intensive borrower has a material default (i.e. non-payment default) or goes bankrupt, the lender relies on the liquidation of the hard assets (inventory, equipment, etc.) to repay the debt. Insurance brokers were historically considered more risky given the lack of hard assets, but the consistently strong, predictable cash flow of insurance brokers (which drives the value of their books of business) has proven their creditworthiness now through two of the most recent recessions.
Similar to the financial crisis of 2007-2008, MarshBerry’s market intelligence suggests there have not been any material defaults by insurance brokers during the pandemic resulting in a liquidation of their assets (i.e. book of business) to repay their debt. With insurance brokers performing at these levels through the two most recent recessions, they continue to be one of the most sought-after industries as prospective banking clients.
If you have questions about Today’s ViewPoint, or would like to learn more about borrowing in today’s environment, please email or call Gerard Vecchio, Managing Director, at 212.972.4886.
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Source: Intercontinental Exchange (ICE) Bank of America (BofA) U.S. High Yield Index Option-Adjusted Spread [BAMLH0A0HYM2], retrieved from FRED, Federal Reserve Bank of St. Louis.
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