Buyers of U.S. companies worth $10 million to $250 million are borrowing more money and coming across with less of their own cash investment, says Philadelphia investment banker Andy Greenberg, a partner in GF Data, which tracks deals by more than 200 midmarket investment banks.
It's not that banks, which cut back on deal finance in the 2008 financial meltdown, are back again making more and cheaper loans -- it's that business-development companies (BDCs) and other private lenders are willing to take on more risk and bidding up prices, Greenberg tells me.
The "void" left by banks "has been filled by non-bank financial institutions with greater risk appetites and fewer regulatory restrictions," Greenberg says. Pressured by BDC competition, mezzanine funds and other lenders that once offered high-interest-rate debt "subordinated" to cheaper "senior" bank loans have instead been offering one-size-fits-all "uni-tranche" financing at or below 10% interest rates.
As proof, Greenberg points to the typical debt-to-earnings (before interest, taxes, depreciation, amortization) for uni-tranche financing zoomed to 4.8X in the first half of 2014, up from 3.3X last year. Accordingly, the direct equity investment on uni-tranche deals has fallen from almost 60% in 2011 down to below 40% this year -- below the equity still demanded in senior-and-subordinate deals.
Greenberg's conclusion: "Competitive pressure is driving down the cost of senior debt" on deals large enough to appeal to different forms of financing. Whether investors who are financing these deals can tolerate the resulting higher risk might not be apparent until the next economic slowdown.