Main Street blues

Unlike megabuyouts, the middle market took some time to get the shakes. Lenders feeling the gnawing effects of the credit freeze have extracted premium terms and higher pricing on selected deals. That is, until the tumultuous weeks of late, when the Fed bailout failed to stop the markets' precipitous slide, recession fears deepened and the financial crisis spread worldwide.

Clearly, every major midmarket lender has by now been hurt -- even the mighty General Electric Co., whose GE Antares Capital unit, part of the company's massive GE Capital financial services division, has historically dominated midmarket financing. "The last two weeks have not exactly been business as usual," quipped a GE spokesman Oct. 13.

While the conglomerate recently allayed fears of deteriorating performance at its financial services unit, no one is immune. In its latest earnings results, GE promised to pare down GE Capital's future borrowings and scale back financing new deals. GE Capital, which had some $700 billion in assets as of Sept. 30, is greatly reliant on short-term commercial paper to fund transactions. It faces higher borrowing costs and a potential liquidity squeeze if financial markets continue to worsen.

At its midmarket corporate finance arm, GE Antares Capital denies that it has pulled any commitments or stapled financings. Contrary to what several investment bankers and loan arrangers have told The Deal, the spokesman asserts that the unit has not suspended operations, but it has definitely pulled back, along with the rest of
the market.

Still, the unit, which accounts for about 25% of total midmarket financing (for transactions of $250 million or less in size), stayed atop the league tables, completing 15 deals totaling $1.2 billion in the third quarter, the spokesman adds. Between Sept. 30 and Oct. 6, GE Antares closed five transactions, including an $89 million senior credit facility for Salt Lake City-based Huntsman Gay Global Capital Partners' purchase of Turner Bros. Holdings LLC from Saw Mill Capital LLC of Briarcliff Manor, N.Y.

Both GE and Allied Capital Corp., a Washington-based business development company, maintain that their new joint venture, Unitranche Fund LLC, a $3.6 billion pool providing blended senior secured and junior debt facilities to companies with Ebitda of $15 million to $90 million, continues to fund deals. "We've honored all our commitments and staples. We are very much open for business," the spokesman says. On Oct. 10, the fund closed its eighth investment since its launch in December. Sources have said, however, that the latest market turmoil has forced the parties to reassess their cost of capital.

Meanwhile, the vacuum has allowed some lenders to take market share. Chicago's Madison Capital Funding LLC, backed by New York Life Insurance Co., says it doesn't have the same capital constraints of its rivals, though it, too, is feeling some pain. "It's a bit of a Catch-22 -- we're definitely seeing all the dealflow out there and have the ability to be more selective," says Christopher Williams, managing director of the firm, which offers senior debt and underwrites one-stop debt. "On the other hand, we need players to close the transactions, and it's tough." Still, he adds, the firm's total deal volume is up.

Others have tapped small regional banks, as Chicago's Pfingsten Partners LLC did when it acquired Canton, Ohio, electrical equipment maker Technibus earlier this month. The firm paid almost 60% in equity and asked Sheboygan, Wis.-based M&I Bank FSB to provide senior debt.

When in doubt, there's always sale-leaseback financing. Sun Capital Partners Inc. of Boca Raton, Fla., bought automotive floor mat maker Kraco Enterprises LLC, also in early October, using a sale-leaseback, where the company sells real estate assets and leases back the property. Of course, like everything else these days, the pricing is a lot higher. -- Luisa Beltran contributed to this report.