Market Moments That Matter | Beat The Heat

As the dog days of summer draw to a close, beachgoers are not the only ones trying to beat the heat. Corporate borrowers continue to feel the pressure of increased interest expense amidst a stagnating economic environment. Cash is king, and preservation of liquidity is top of mind in the C-suite as lenders are monitoring key ratios more frequently than ever. Here are two trends that borrowers are leveraging to beat the heat:

PIK interest: Borrowers are frequently requesting a “PIK toggle” for incremental cash flow flexibility, and qualifying existing loans are increasingly seeing this option triggered. Of course, there’s no such thing as a free lunch, as PIK interest typically accrues at a higher rate than cash pay. Lenders’ portfolios are seeing this shift to non-cash returns as borrowers focus on cash preservation.
Unitranche loans: Accounting for nearly 80% of sponsor-backed financings in July, “uni” structures provide an attractive alternative to bank loans by offering low quarterly principal payments while achieving a similar blended cost of capital as compared to a combination of senior and mezzanine debt.