Private equity has been dead, dead, dead in 2009, and the industry can thank the lack of available debt financing (among other things). However, some middle market firms have found regional banks willing to fill the void left by wounded senior debt providers.
In recent months, debt providers like Keybanc Capital Markets, SunTrust, Fifth Third Bank, Union Bank and Tri-State Capital Bank have stepped up their efforts in providing senior loans for sponsor-backed transactions. With the traditional providers of capital, like CIT, GE Capital, and the bulge bracket banks on the sidelines. The regional lenders weren’t as active in the LBO business over the past three to four years and haven’t been hurt by “market excesses,” so now is their time, according to lenders I spoke with.
For example, Keybanc Capital Markets has launched efforts to expand its financial sponsor coverage, hiring former CIT Managing Director Thomas N. King as a managing director within its financial sponsors group, as well as Christopher J. Porter, formerly of Jefferies & Company, as a managing director in the firm’s East Coast sponsor group. The firm recently provided financing alongside Tri-State Capital Bank and US Bank for the add-on acquisition of Blendco Systems by DuBois Chemicals, a portfolio company of Riverside Company.
Fifth Third Bank provided the financing for FdG Associates’ acquisition of Joseph B. Fay Co., a civil constructor and demolition company. The company has also provided debt, alongside Stonehenge Partners, for the acquisition of E.B. Bradley Co. by Industrial Opportunity Partners.
Bill Schenk, President of Tri-State Capital Bank, said sponsor-backed transactions are “an important part” of the firm’s new business development, as these opportunities have increased over the past 18 months. Current private equity-backed loans make up around 10% of the firms $1.2 billion loan portfolio. In addition to the Blendco Systems deal for Riverside Co., Tri-State Capital Bank provided financing on an add-on acquisition for Riverside Co.’s ActivStyle, a distributor of medical supplies.
Regional banks are typically more conservative in their capital structures, requiring lower total leverage in deals they back, which made their terms less attractive during the boom time. But now a deal with 2x to 3.5x Ebitda looks attractive.
On top of that, regional banks are able to offer aggressive pricing terms. Because their cost of capital is lower than that of the large lenders thanks to their deposit base, regional banks are satisfied with lower spreads on their debt pricing. Regional banks are often satisfied with LIBOR+450 to 550 on senior debt, because the average spread in their portfolios of non-sponsor corporate debt may be LIBOR+350. Meanwhile, new issuances from traditional middle market lenders are typically in the LIBOR+650 range, one middle market lender said.
Another reason some regional banks can offer aggressive pricing is because they typically expect to garner related business from the borrower, such as depositories, fund exchange, cash management, and currency trading, all of which provides an additional subsidy to the regional bank’s business.