Last week, our firm hosted a workshop at the annual conference for the Los Angeles chapter of the Association for Corporate Growth (ACG). Our topic was “Finding Financing in a Difficult Market”. No one in the room needed to be convinced that the market is indeed difficult these days.
Our workshop was focused on trying to find the few bright spots in the market. There was a senior lender on the panel, who indicated that the market for senior loans may not be quite as dead as people seem to think. For example, the ABL market continues to be active and can be a good source of funding for underperforming companies that have valuable assets. On the cash flow side of the house, there are some borrowers that the banks would like to loan money to, but many of those companies seem to be on the sidelines waiting for the market to change.
Our experience in recent months has been that senior loans are still available in some situations, but for a number of companies this kind of financing can be hard (or impossible) to find. Within this constricted market, we’re still seeing acquisitions and other types of deals getting done, but rather than relying solely on senior financing, most seem to involve a combination of sources of funds, including equity, mezzanine and sometimes various forms of second-lien/mezz hybrid financing.
We’ve seen the role of mezz lenders in corporate acquisitions dramatically increase in the last few months. In the workshop, I described a recent deal to acquire a middle market manufacturing company. The private equity fund relied on a combination of equity financing, a structurally subordinated loan to the holding company, a small senior revolving loan for working capital, and a secured mezzanine loan that looked much like a second-lien loan. Piecing together financing from various sources –with some very complex intercreditor arrangements – got the deal done.
Reed Smith partner John Iino discussed a major trend that our mergers and acquisitions practice is seeing: an increase in deals being done on an all-equity basis, without a debt component. This is the only way to go when debt financing is unavailable. Many of the acquisitions are strategic combinations. And it’s not uncommon to see the equity funding for companies (and transactions) come from foreign investors.
It will be interesting to see where the market takes us in the next few months.