Mid-Market Lending: Not All A-Okay

Stop me if you’ve heard this one before: The credit crunch has not really impacted the middle markets.

I think certain mid-market lenders actually answer the phone that way — reaching for A-list status while the bulge bracket dries out in rehab. And it makes a certain amount of sense, given that smaller transactions rarely included the types of sponsor-lovin’ terms that turned radioactive in early July. But it also glosses over a significant bifurcation among mid-market lenders: Traditional underwriters whose balance sheets can hold big bonds, and middle-men who lend primarily for the purpose of syndicating.

The former group is mostly OK, save for a pulled IPO here and minor layoffs there. But the latter group is in some serious trouble. For example, Buyouts Magazine today reports (sub req.) that Cratos Capital recently “sacked one of its two founders and laid off nearly a third of its staff.”

Cratos was formed just about one year ago, and more closely resembles a CLO than a traditional lender. It lives — or lived — on fee income, and doesn’t really have the balance sheet power to handle the lean times. There were a lot of these bnotiques launched between 2005 and 2007, and word is that more than just Cratos has fallen on desperate times. I know of at least one Cratos-clone that has been cut off by a Wall Street sugar daddy that has major problems of its own.

So next time someone tells you that all is swell in the middle-markets, make sure you know just which middle-markets they’re talking about…