It’s no secret that money has been cheaper than ever before during the past year as governments across the globe attempted to ensure a smooth recovery from the economic effects of the Covid-19 pandemic. The ease of obtaining financing has played a role in record M&A deal volumes between July 2020 and June 2021, totaling more than $1 trillion in each of the past four quarters through the end of June. To start the fourth quarter, however, the world’s leading central banks have signaled that they will start to phase out the policies that have allowed households, companies and governments to borrow at incredibly favorable rates. Assuming the momentum in the M&A market continues, market participants will likely need to adjust their playbooks over the next several months as financing becomes more expensive.
For sellers, advisers will certainly emphasize stronger scrutiny of buyer’s financing commitments, and cash-on-hand offers may become even more competitive. Meanwhile, buyers will surely be even more squarely focused on negotiating borrower-friendly loan agreements and pay greater attention to lender protections in loan documents. When negotiating with sellers, purchasers will continue to look closely at add backs to EBITDA as they try to squeeze back value lost to higher pricing in loan agreements. The acceptance of EBITDA-C, or earnings before interest, taxes, depreciation, amortization and Covid, as a valuation metric is expected to soon become a thing of the past. As the world’s businesses focus more and more on becoming sustainable, ESG objectives, too, will become increasingly more common in credit and purchase agreements.
With these changing tides, 2022 may bring great uncertainty. Will lending that has favored sectors viewed as lockdown resistant continue or begin to fade? How will dealmaking be affected by the health of the leveraged finance market – which has come into question in recent weeks despite a record volume of loans issued for LBOs and other M&A coming into the market this summer – as climbing interest rates and inflation pressures more generally could set industries that have yet to recover from Covid on a path toward default? How big of a role will procurement finance play for businesses attempting to navigate the complex supply constraints of the Covid era? And will alternative M&A financing methods grow in popularity as traditional lenders tighten their purse strings?
Join us on Dec. 7 as The Deal hosts a roundtable presented by global law firm Pillsbury Winthrop Shaw Pittman LLP to discuss these paramount concerns at the intersection of M&A and finance.
Joel Simon represents clients in a wide range of commercial transactions spanning leveraged, acquisition and commercial finance, private debt and equity investments, special situations, corporate and financial restructurings, and general commercial advice.
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