The Banking Crisis And Impact On Acquisition Financing

Posted on: April 3rd, 2023

acquisition-financing

Historically, banking market turbulence has presaged contraction in middle market acquisition financing. This has been the historical norm starting with the S&L crisis of the late 80’s through the Asian contagion crisis in the mid-90’s through the Great recession in 2009. When banks go bust, lending tapers off as banks hunker down waiting for the next shoe to fall.

While the proximate cause of each banking crisis is different, they lead to a period of economic gloom which weighs on the confidence level of acquisition financing providers. Acquisition financing relies on the lenders’ belief in future actions occurring according to plan. In times of prosperity, with growth surging this is a low-cost bet to make. When the market turns bearish and banks are failing, most acquisition financing lenders tighten their screen and lend to only the highest quality deals. This leads to a flight to quality in the market with inferior deals not getting closed.

In times of stress, the withdrawal of acquisition financing competition in the market creates favorable conditions for lenders, provided they have the nerves to lend. The uncertainty of future regulatory requirements causes most bank acquisition financing lenders to tread cautiously. They do not want to do a deal that could be perceived as too risky according to new regulatory requirements. This internal recalibration causes acquisition financing lenders to inwardly focus on risk ratings and portfolio management as opposed to new deal origination and underwriting.

Since the last bank crisis in 2008-9, there has been tremendous growth in the private credit industry. From its origin when it was called the shadow banking system, this segment has come of age as a significant alternative asset category with over $1 trillion in AUM. The size of this segment and its readiness to deploy is a major point of contrast between this bank crisis and the 2008-9 one. As banks get conservative, these new forms of acquisition financing lenders will step into the breach and undergird acquisition financing supply for middle market companies.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.