About nine months ago, I posted a story called “Five Things You Need To Know About Debt Today,” based on conversations I’d had with middle market lenders. I decided to revisit that list o’ debt trends today to see what, if anything, has changed since November 2008. Here they are:
1. Sponsors are raising captive mezzanine funds to finance their own deals.
With mezzanine so expensive, sponsors began thinking, “Why give away the upside to someone else? Why not have no-contingency financing at their fingertips with our own mezz fund?”
Today: This is no longer the case. Firms like Insight Equity have succeeded in raising their own mezzanine pools, but the current outlook has tabled mezzanine capital as a priority in lieu of focusing on a much rarer commodity: senior debt. Besides, 2008 mezzanine funds raised a record-breaking $25 billion in 2008 while deal flow continued to shrink.
2. The ceiling deal value is around $150 million.
As of November, lenders weren’t willing to hold more than $25 million to $35 million on deals. That figure was even lower for the middle market, with lenders tapping out at around $10 million to $25 million.
Today: The deal value has increased, as evidenced by deals like Friedman Fleischer’s buyout of Church’s Chicken for between $300 million and $390 million. Today the ceiling debt facility is topping out around $150 million. The Church’s deal contains a $155 million facility co-led by Bank of America, Golub Capital and Wells Fargo.
3. Asset-backed lending (ABL) isn’t as hot as everyone expected it to be.
Despite hopeful predictions related to ABL’s low risk profile, the asset class never took off because of its high capital requirements.
Today: That continues to be the case, but at this point, expectations that the ABL market would “heat up” have fallen to the wayside as well.
4. The few senior lenders that do have money to lend are looking at the secondary debt market with greater interest.
The debt on old large cap deals was trading at such a discount that lenders are wondering, “Why bother with new issuances?”
Today: Secondary action has tapered off for the opportunistic buyers as the market dislocation has righted itself. Most of the prices on good assets have hit a plateau and attractively priced assets are likely to deteriorate in value further. “The run-up is done, people are looking elsewhere,” a lender said.
5: Lenders aren’t agreeing to add-on deals without refinancing a company’s original capital structure.
A large gap in debt pricing between 2006 deals and 2008 deals led to “a game of chicken” between sponsors with add-on deals and lenders to the portfolio companies. Lenders were winning.
Today: The tables have turned slightly-lenders have realized they can’t demand mark-to-market terms for every existing facility. They’ve opened the door for a constructive dialogue for finding a middle ground on terms for a company’s post-add-on acquisition credit facility.
Previously: Five Things You Need To Know About Debt Today
ACAS Alums Form New Mezz Fund: Boathouse Capital
Q&A With Babson Capital On the State Of Your Debt
Mega-Buyout Firms Getting Stomach Aches From Gobbling Up Discounted Debt