That’s because the middle market is simply not strong anymore, particularly on the lending side. Take GE Capital, which today revealed cracks on the wall:
G.E. said it was seeing rising delinquencies on its consumer and commercial finance business. It plans to set aside provisions for pretax losses of $6.6 billion this year, a sharp rise from 2007, and it expects losses to rise next year to $7.5 billion to $9 billion. (NY Times)
This supports yesterday’s story in The Deal, which reported GE Antares has suspended new financing until January (sub req):
Chicago-based GE Antares, which dominates the middle market, has walked away from commitments and even pulled staples, sources said.
It’s true that GE is, for the most part on the sidelines, a source told me, but the firm is still looking at deals. Same goes for Madison Capital, which is rumored to be closed for business. “They’re saying yes. Not often, but they’re still saying yes to conservatively levered loans with low loan to enterprise value and a lot of equity.”
“Not very often” is pretty damaging, when it’s the two largest mid-market lenders. In Q3 ’08, deal volume was down 22.2% from Q3 ’07, which was a post-credit crunch quarter itself. This week alone, peHUB tracked a mere 17 new deal announcements. Depending your size threshold for middle market, most of these deals barely even make the cut.
The middle market even was down at the start of this year, when a headline from Buyouts proclaimed, Middle Market Showing Bruises From Credit Crunch (sub req):
Indeed, the disappearance of securitizations for virtually any kind of asset has wiped away roughly half of the buyers of middle-market debt, said Robert Long, managing director of business development company Allied Capital Corp.
Yet it is still impossible to get anyone to admit they can’t do deals. I can’t tell you how many people — some in denial, some lying through their teeth — try to sell me on the idea that “since the middle market didn’t use the same leverage as the big guys, we aren’t seeing the same fall-out.” I don’t buy it.
Over the past six months, we’ve seen mid-market guys doing all sorts of crazy lending maneuvers to get cash together for deals. Insight Equity is raising a mezzanine fund, Sterling Partners is raising a co-invest, and 3i is using cash from its own buyout funds to bridge its buys. American Capital is providing seller financing on exits, and Gryphon Investors is lending from its LPs. Meanwhile, lower middle market shops are tapping regional banks for the loans.
So the jig is up for all you PR spinsters out there. The middle market is not robust, or even fine. It’s hitting the same roadblocks as everyone else, and dealing with it in much the same way: with creativity, stubbornness, patience, perseverance, panic attacks, and everything in between.