By Sarah Pringle and Milana Vinn
As fear continues to circulate the market amid the coronavirus outbreak, PE investors, bankers and lenders are attempting to hash out how their deals and processes could be disrupted.
It’s too soon to say how serious the reaction to COVID-19 will be, but through PE Hub’s conversations with dozens of sources, it’s clear that many sale processes poised to kick off will hit the pause button. Leverage and deal valuations could also be impacted, said sources, who did not want to be identified in sharing personal opinions on the market landscape.
“In speaking to bankers [over the] last few days, they are all delaying their process launches, rightfully,” said a senior member of a large buyout fund. “No one wants to launch during this thing – no one can actually go meet with management teams!”
In fact, another sponsor recently told PE Hub that she was asked to list her travel in the last two weeks for “vetting” before meeting with a company’s deal team. The investment professional was subsequently banned from going to the company’s office because of her travel outside of the US – although none had been to a country with a coronavirus case at that time, she said.
“We are still seeing deals getting done but there is a lot of uncertainty and nervousness …[It’s] just that no one is looking to launch a process amidst all this,” one investment banker said.
“We’re likely only a week or two away from people having to make the real decision to either fully pump the brakes or try to muddle through with video conferences,” a second M&A adviser added, noting that the latter is already occurring with respect to his firm’s IPO-advisory roles, with investors calling off in-person meetings.
So what about sale processes already underway or deals under letter of intent?
The coronavirus is an “easy” or “convenient” excuse to pull a process that’s not going well, a fourth investment banker commented.
A fifth banker told PE Hub the impact of the coronavirus is industry specific. Anyone touching end-markets such as entertainment, travel, hospitality and energy “are stopped indefinitely,” the advisor said. “Not good at all.”
On the other hand, another banker who advises healthcare companies said, “I don’t know of a company yet that is meaningfully impacted.”
Still, in some situations, you could see the timeline get pushed back for companies that were under exclusivity and thought they were two or four weeks away from closing, one lender told PE Hub. “There’s a chance that those investment committees say: ‘We’re pencils down for now.’ Deals that had rounded 3rd could be postponed.”
On leverage and valuations
For ongoing deals or auctions already underway, things seem to be proceeding at the moment – but debt financing is “very much TBD,” one of the sponsors commented. At a minimum, debt commitments in the next few weeks are likely to have less leverage and higher flexibility, this person said.
Market sources agreed that leverage will remain a factor of risk and price. With “almost every deal I [have] worked on, we’ve changed the risk. We price risk by taking leverage down and taking prices up,” one lender told PE Hub.
It’s times like this that even a good company can suffer from liquidity issues in the short term, added another lender. “We’re really going to be looking at balance sheets.”
From a valuation perspective, one of the bankers said that, for now, it’s unclear if COVID-19 will be impactful to valuations beyond 0.50-1.0x turns of EBITDA. There are no concerns on leveraged lending yet, just widening pricing at this point, the banker said.
There is a two-sided effect, another advisor said. “Bankers are now underwriting for higher risk, but the Federal Reserve is actually cutting down interest rates. Although interest is coming down, covenants may tighten up. Banks may want to ask for additional protection and amortization and people on the buy-side may want to wait.”
Another way valuations could potentially be impacted? Sources pointed to a clause known as MAC, material adverse change, or MAE, material adverse event – once common during the global financial crisis. By including such a provision in a transaction agreement, the buyer of the business being acquired can “walk” from a deal if they can prove the company’s financial condition or operations have suffered as a result of the MAC/MAE.
It’s also important to note that while investors and lenders may not be able to control the pace of play, domestically, PE firms and lenders continue to sit on huge sums of capital, sources agreed.
A lot of people that were lining up in January to re-price their loans have also put those on hold, one of the PE sources commented. “There just isn’t a market right now. I’m not reading that as an indication of doomsday. It just happens when there is too much uncertainty. It works itself out eventually.”
The stock market volatility could also be reflected in deal valuations and potentially create some opportunistic activity, one banker added. “PE firms still have all that dry powder and are licking their chops.”
Action Item: Read more coverage on how the coronavirus is impacting travel and annual meeting season on sister publication Buyouts.