Lending Markets In Full Swing
CLOs and credit funds take center stage as all financing vehicles perform well
Since the global economic downturn, the lending markets have had their fair share of ups and downs. While the number of lenders still in the business has dwindled substantially, remaining lenders are taking on larger pieces of debt and financing more deals, easing the burden on private equity firms trying to put together a syndicate. What's more, collateralized loan obligations are in full force, with CLOs providing the lowest borrowing costs since the financial crisis. Credit funds are gaining in popularity as well. Mergers & Acquisitions convened a special roundtable to discuss the benefits and challenges associated with different lending vehicles in today's market. Boston-based commercial finance firm NewStar Financial sponsored the event, and the excerpted discussion that follows provides a range of perspectives from key players who are working in and with the financing companies. Participants included private equity investors, one of which invests in financial services companies, and lenders.
Fugazy, Mergers & Acquisitions (Moderator): How do today's overall economic conditions affect the financing market?
Conway, NewStar: Our business is driven, in part, by the volume of M&A activity completed by mid-sized companies. Activity has been relatively slow for a couple of years now, but we have seen a significant pickup in loan demand beginning in the second quarter. In terms of the overall economic environment, we see slow but steady growth in most sectors. The debt markets continue to be very liquid and there's been strong demand for high-yield assets among fixed income investment options from investors.
Brokaw, Corsair Capital: You had a lot of people looking to discuss opportunities coming out of the financial crisis, and as the world heals itself there's a confidence level that's returning in the U.S. One of the challenges is as confidence returns valuations are improving and high valuations can put a strain on people's ability to do transactions. Activity has been moderately active, which has been driven by the fact that financing has been readily available and cheap.
Najjar, Cortec Group: During the fourth quarter of last year there was a lot of deal activity and very good lending markets. Deal flow slowed during the first six months of this year, which has driven up valuations. Financing levels have gotten even more aggressive because a number of lenders have raised capital they want to put to work, resulting in strong demand for good deals. We expect to see an increase in deal flow in the second half of the year because people are starting to see businesses trade for premium valuations and are looking for exit opportunities. In fact, we've seen a significant increase in deal flow over the last eight weeks as people are starting to realize that it's a good market to be selling their businesses.
Fugazy: How have middle-market sources of capital evolved since the credit crisis?
DuBose, Wells Fargo: There's still limited financing available for middle-market loan originators/lenders today in comparison to pre-crisis. If you think about those that participate in the middle market-the finance companies, the business development companies, the direct lending funds, which are a combination of originators partnering directly with the private equity firms and the funds that are acquiring assets/pieces of a syndicated loan that would be structured and agented by a company like NewStar-the range of products and financing opportunities across that spectrum is varied, but the number of banks lending to middle market lenders is still not at pre-crisis levels.
Conway: I would define the traditional middle market as private companies with between $5 million and $30 million of cash flow. Pre-crisis, you could rattle off the names of 30 lenders that were actively involved in direct origination in the middle market plus a wide range of banks. Post-crisis, the nonbank universe really shrank to five or six players. We are now starting to see more banks come back into the market and be more active. I'd say half the deals that we do include a bank in the lending group. I think that will continue to increase.
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