Banks in lower middle market grow more difficult: panel

  • Regulators are looking more at underperforming businesses
  • Surging M&A market sees rise of many non-bank lenders
  • Debt lenders are more tolerant

Banks are taking a harder line when lower-middle-market companies run into trouble, an executive told Buyouts Insider’s PartnerConnect Midwest conference.

Banks used to be willing to work with companies but have become more difficult, said Lester Alexander III, a partner with lower-middle-market PE firm Jefferson Capital Partners.

Now, lenders are a “little quicker” to pull the trigger when companies breach their financial covenants, Alexander said during a panel, “Frothy Valuations, Copious Dry Powder and Healthy Corporate Balance Sheets: How Should Managers Approach New Investments in the Current Market?”

“Small companies will stumble,” Alexander told a room filled with LPs, GPs and lenders. “Banks want [the company] to get back into covenant compliance or they’re asking to be refinanced out of the loan.”

Alexander said he’s seeing the issue “more than I used to” for companies with Ebitda of $2 million to $8 million. Banks are responding to pressure from regulators, who are looking more at underperforming businesses, Alexander said.

The surging M&A market has seen the rise of many non-bank lenders. Debt funds are taking the place of commercial lenders in many transactions, a PE source said.

When structuring deals at the original purchase price, non-bank lenders often are more flexible on certain terms like principal amortization or financial-covenant levels, the source said.

Scott Finegan, a managing director with Pfingsten Partners who also spoke on the panel, said companies with issues should “shoot straight with the banks.”

“Understand the situation,” Finegan said. “Don’t show up and say you have a problem. Show up with a solution.”

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