Blurred Lines & Loose Credit: 2018 M&A Lending Market Outlook

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Key take-aways from the February 15th breakfast briefing

By Lee King, Wells Fargo Middle Market Banking

 

Argosy Private Equity’s Founding Partner, Kirk Griswold moderated ACG Philadelphia’s Annual Lenders Panel on February 15, facilitating an insightful discussion among seasoned panelists on the current lending market. Held at the Philadelphia Country, the event drew more than 150 dealmakers from around the region. Here are some of the panel’s most interesting comments.

Featured Speakers

  • Mary Lou Lequire, Founder and President, Lequire & Associates, LLC

  • Brian McDaid, General Partner, Spring Capital

  • Mike Rainone, Market President, BB&T

 

KNOW THE DOWNSIDE TO LOOSE CREDIT STRUCTURES

“Risk shifts to the borrower.” Mike Rainone warned that while credit structures on a broad basis have loosened in recent years, borrowers with infrequent financial reporting requirements (i.e. semi-annual) and high leverage covenant ratios must realize that it is incumbent upon them to be timely in communicating issues to lenders, as ”springing issues on the bank ties the bank’s hands.” Mary Lou Lequire commented that credit funds tend to react quickly, as “they have less patience than banks.”

SPECIALTY LENDING IS A DIFFERENCE MAKER

Today lenders are more reliant upon industry specialists to both become comfortable with companies in certain industries and to differentiate themselves in competitive situations. Rainone advised that if you don’t have a specialty(s), you should find one soon.

BLURRED LINES AMONG LENDERS

Over the past decade there has been a proliferation of capital available from alternative lenders as well as consolidation, as large institutions have looked to acquire boutique firms. Lequire pointed to how many asset-based lenders historically focused on $3 to $5 million deals have turned attention upstream by virtue of their larger parent companies (ex. asset management firms). She also sees more alternative lenders diversifying and expanding their lending products. Brian McDaid added that Mezz Lenders like to control the deal - similar to a unitranche scenario. In one recent transaction, there were 7 mezz lenders, which he commented was ”great, so long as there isn’t any workout scenario.”

VALUATIONS ARE UP… FOR NOW

McDaid believes that banks and mezzanine lenders have become more amenable to management adjustments to EBITDA. He recalls a cloud services technology business with leverage approaching 6x and a valuation of more than 10x EBITDA.

THE DEFINITION OF “LEVERAGED” LARGELY REMAINS THE SAME

Across traditional banks and mezzanine lenders, the most common definition of “leveraged” remains in excess of 3x and 4x for senior debt leverage and total leverage, respectively.

HEAVY COMPETITION TEMPERS THE RISE IN INTEREST RATES

There is large sentiment that interest rates will rise in the near term. However, the limited volume of transactions relative to ample supply of credit across the spectrum of lenders has helped sustain low spreads for borrowers with solid risk ratings. Lequire suspects the looming increases will not deter many borrowers, as 1% to 2% increases are offset by the cost efficiencies many firms have realized in recent years as well as generally positive outlooks for growth. Additionally, the willingness of some traditional lenders to take on both senior and mezzanine positions has presented challenges for some firms, particularly for smaller commitments

ASKING THE RIGHT QUESTIONS GOES A LONG WAY

When choosing a lender, companies and investors must do their diligence. McDaid and the team at Spring Capital will tell you to call who they’ve dealt with in the past. Rainone suggested a few questions to help uncover the right partner: “What did you do when the economy hit bottom? What else are you going to do for me (other than make my loan)? How are you going to help me take my business to the next level? What’s your tolerance if we make an acquisition?

Thank you to our breakfast sponsor Drinker Biddle & Reath.
 

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