The Unsavory Shape Shifting of Acquisition Financing Lenders

Posted on: April 16th, 2024

acquisition-financing

The deal world thrives on the belief that the institution providing acquisition financing will deliver on their promise. Lenders usually telegraph their capital capabilities early on during the sales pitch and give their deal sizes and hold levels for their fund. Usually in a process, there is a lender who can fund the whole loan themselves and lenders who need to team up with others to get to the desired capital ask, known as a club deal. Most borrowers prefer to work with one lender versus multiple lenders, as the diligence process is easier and more streamlined. Even though lenders in a club deal use the same loan agreement, they are independent and have their own approval process, which decreases the certainty of closing.

Understanding the Impact of Shifting Lender Dynamics in Acquisition Financing

In today’s deal market there is a growing trend of a lender proposing as a single lender but then post-letter of intent sign-up, shifting to a multi-lender approach, particularly when there is an accordion facility as part of the loan structure which requires additional funding. Although the need for the delayed draw term loan accordion was thoroughly discussed on the front end, and the acquisition financing lender proposed on the deal as a single lender, they unilaterally decided to bring in another lender after the fact. While the lender has this right to do this based on their term sheet, the borrower negatively perceives this move due to the importance they ascribe to working with a single known lender.

Most borrowers are very invested in building a special relationship with their acquisition financing lender due to their importance to the growth plan of the business. When the lender decides to bring in someone else, it sends a transactional vibe to the borrower that the loan arrangement will be set up to their preferences and not necessarily the borrower’s. This shape shifting from a single to multi-lender approach creates a more impersonal approach and a harder due diligence path for the borrower. Even though it is advantageous for the acquisition financing lender, it allocates more resource cost and closing risk to the borrower without any additional upside. In the eyes of the borrower, this type of shape shifting is unsavory and misaligns interest at a time when the two parties should be building goodwill in a relationship of trust.

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.