A Look at Different Credit Options for Mid-market Companies

Posted on: September 11th, 2018

Mid Market Companies Credit Options We are in the midst of a golden age for mid-market financing with strong loan supply and lender competition. There are three primary lending channels available to mid-market companies – banks, mezzanine funds and non-bank direct lenders.

Non-bank direct lenders have become a major market force with approximately $181 billion of assets under management as of the end of 2017. These funds include private equity firms, business development corporations, and independent funds.

Their competitive edge is in doing tougher deals, and lending on cash flow. Asset growth for Non-bank direct lenders continues strongly driven by the hunt for return stability and attractive floating rate yields.

Non-money center banks including community and regional banks are more aggressive as they are no longer subject to the restrictive regulations imposed by Dodd-Frank.

Many of these smaller regional and community banks are seeking to increase their assets in commercial and industrial lending, and are using aggressive cash flow structures and long term maturities.

Mezzanine lenders are feeling the heat from both the non-bank direct lenders and banks. They are focusing on doing higher multiple deals, particularly non-sponsored deals where they can earn more return.

All three credit channels are seeing rising loan issuance growth rates and growth in new fund formation and assets under management.

The implications for the middle market companies are profound. The sheer size of capital available from the non-bank direct lending channel is massive compared to the size of the middle market.

Middle market companies have a great opportunity to secure loans for acquisitions, refinancings and even recapitalizations. Here are 4 tips for companies looking to tap these markets:

Source across all three lending channels – Tapping into each channel will give you the broadest set of options, and the most term sheets. Each channel is unique in their structuring approach which will give you a wide palette of colors to design your final structure with.

Focus on quantity of capital vs. price of capital – most mid-market companies underestimate the amount of finance they need, which creates funding gaps and inhibits growth. Ensure the lender you pick can not only provide your initial need but follow on financing need.

Create an updated and compelling company presentation – ensure you have an exciting growth story to tell your lenders, and take the time to ground your presentation in both strategic and financial frameworks.

Make sure your financial statements are clean and understandable.

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.