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With the financing of megadeals hitting walls, the middle market is bracing for fallout, and with lenders tightening the screws, the effects are being felt by companies and sponsors alike. The Deal's David Carey moderated a panel consisting of Brad Boerick, a partner at Pepper Hamilton LLP; Thompson Dean, managing partner and CFO at Avista Capital Partners; and Robert Willens, a managing director at Lehman Brothers Inc., that discussed the middle market and the credit crunch. Dean commented that while the middle market didn't participate as much in the LBO debt bonanza, it has still pulled back. However, there are still plenty of middle-market sponsors and hedge funds that didn't get into the LBO rush, who are still doing deals but in a more conservative manner. Boerick agreed that most lenders are saying "they're open for business 'for the right kinds of deals.' " With leverage less available than it was, Boerick added that sellers are waiting on the sidelines to see how things go.
Hung DebtWhile the large-cap market works its way through all the debt that has to come to market, there has been a real tug of war between the banks and sponsors. Dean said that banks are now willing to provide PE firms with the leverage needed to buy the hung loans on their own deals. Such a move could allow PE firms to buy the debt from the banks cheap and record a 20% IRR on it later, while the banks would be able to get the debt off their books now. Though he thinks there's enough liquidity to solve the credit crunch, he feels the real question is "who's going to take the pain." There are about $30 billion in losses to be absorbed by the banks, creating a real dilemma because if the banks accept the pain, it's a lot of pain, but if they keep the loans on their books they won't be able to get back to business. After effectsGoing forward the panelists agreed that secondary buyouts are going to take the longest to recover; with leverage dried up, PE sellers are going to have a hard time receiving higher multiples in their auctions. In the middle market, Boerick said that while a great number of deals have gone through with no problems, there has been an equal number that have run into trouble. While some banks and sponsors have tried to back out of deals despite lacking a "leg to stand on" legally, so far the legal language in the agreements has held up. He continued that business is going to have to go back to the old ways, where the sponsors have outs or risk seeing them not participate as much. —George White See the full coverage of the Innovative Deal Financing Conference Categories Deal Video
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