Lenders Will Finance Add-Ons–If They Can Refi Original Terms Of Platform

The constricted debt market isn’t just curbing buyouts, it’s also hindering portfolio companies’ ability to make acquisitions because lenders increasingly want to refinance the potential acquirer’s entire capital structure before agreeing to finance add-ons.

“It’s one of my least favorite phone calls,” said Ron Kahn, managing director at Lincoln International, referring to a hypothetical portfolio company that wants to do a tuck-in acquisition. Carl Thoma of Chicago buyout firm Thoma Bravo said he’s walked away from add-ons because the lenders want to revisit the terms of the original platform acquisition.

Lenders are more likely to take such a path if they don’t have long relationships with the sponsor, said Devon Russell, senior managing director of Madison Capital Funding. “They’re going to do what they can to mark to market,” Russell said. Russell added that the reverse happens when liquidity is abundant.

Nonetheless, popular sentiment is that the debt markets are at least stabilizing. “It’s at a lower level than it was nine months ago, but there is stability,” said Kahn. Jon Leiman, principal at American Capital Strategies, said he’s even seen some CLO activity in recent months.