Middle-market deals are still finding lending sources, particularly on the senior debt financing side, says David Brackett, co-CEO of Antares Capital, which focuses on financing transactions for companies with Ebitda below $100 million and is the largest lender in the middle market. But pricing on the senior financing side has crept up over the last two quarters of 2015, typically to Libor plus 5 percent with a 1 percent Libor floor, up from Libor plus 4.5 percent with a 1 percent floor. The availability of financing component on Mergers & Acquisitions' Mid-Market M&A Conditions Index (MACI) was at its lowest level in January since we began our monthly polls in 2013.
The real shift in financing for middle-market deals recently has been felt on the junior debt side. Prospective investors for the traditional middle-market second-lien loans have been attracted to more compelling opportunities elsewhere, Brackett says—high-yield bonds, for example, where relative yields are better because they are trading at deep discounts. That means junior debt investors need more assurance about the relative risks and returns of the deals and sponsors they are financing.
“There’s no question investors are very, very acutely focused on credit quality right now,” says John Martin, the other co-CEO of Antares. That means many of the debt investors will be more interested in financing add-on acquisitions, where the financing structure is already in place and the company’s business strategy is already known.
The lending climate began to shift in the fourth quarter, and many PE firms responded by going with all-equity deals. Prices for debt financing have been firming or increasing slightly, says Tom Aronson, head of originations for Monroe Capital, which focuses on the lower middle market.
But for the lower middle market, financing for deals generally hasn’t changed. The exception is with companies in the oil and gas sector and commodities-driven businesses, where the global concerns made an immediate impact on deals. For more on the how the energy crisis is impacting M&A, see our video interview with Farlie Turner’s Erik Rudolph.
The changing financing landscape also means that deals will take longer to get done, Brackett says: “This is what we find any time there’s a market disruption: People tend to want to evaluate more.”