Sponsors get active in the summer as financing market remains heated – Primary Loan Monitor - Debtwire

Sponsors get active in the summer as financing market remains heated – Primary Loan Monitor

12 September 2017 - 12:00 am

Deal flow continued to heat up in the middle market and favorable pricing and more aggressive leverage, not surprisingly, have remained as a result, said multiple market participants.


This has allowed companies with a history of distress or tight covenant headroom to find lenders willing to provide funds for a refinancing. With healthier deals, sponsors are seeing the opportunity to cash in on assets while multiples are still high.


“Whether it’s the view that there’s going to be some favorable tax treatment, or simply an acknowledgement that purchase prices are not coming down, or if interest rates are going up. It’s a confluence of factors,” said Garrett Ryan, head of capital markets for Twin Brook Capital Partners’ direct lending business.


“People think it’s time to put money to work. These funds realize the purchase price multiples are not coming down,” he said.


Sponsors are also continuing to pursue roll-up strategies to justify those high purchase prices when it comes time to exit a deal.


“A lot of M&A is for tuck-in acquisitions, which helps the sponsor provide value in reaching their investment thesis,” said Erica Frontiero, head of capital markets for The Carlyle Group.


Total Leverage on middle market deals underwritten on USD 20m in LTM EBITDA is in the 4.5x-6x range for September, according to a report by SPP Capital Partners. That is flat from the previous two months and up half a turn year over year.


Unitranche pricing for deals of that size, meanwhile, is flat in the L+600-750bps range, SPP reported.

Anecdotally, covenants for middle market deals have come under pressure as well.


“EBITDA levels at which you can do covenant-lite loans is coming down,” said Alex Zeltser, a partner in Ropes & Gray’s leveraged finance group. “We used to think the magic cutoff number was 50m EBITDA for covenant-light. Now there will be a discovery as to where the floor is. Aggressive issuers will pressure test that.”


A pair of 25bps rate hikes by Fed in 2017 has been balanced out by the sheer amount of liquidity in the middle market, as credit investors reach further down into smaller deals for yield. Middle Market CLO issuance for example, has totaled USD 8.3bn through 11 September 2017, including a massive USD 2.1bn deal from Antares Capital, according to a Wells Fargo research note. This surpassed full year totals from the previous three years.


And as a sponsors look to finance buyouts, emphasis has shifted from leverage and pricing terms to hold sizes and rapidity.


“I think things got to a level where you can’t really push structures that much more,” Ryan said. “The one thing we are seeing is emphasis on speed to close. More pressure for underwriters in terms of marketing a deal.”


CLICK HERE to view the September Middle Market Primary Loan Monitor.
CLICK HERE to view the September Middle Market Primary Loan Monitor in Excel.


In a deal that will test the market’s appetite for a storied credit, Ramsey Industries is on the block after having filed for bankruptcy in the most recent downturn. The construction and industrial equipment maker is attracting leverage bids around 4x, on around USD 15m in EBITDA.


And ATC Drivetrain, a transmission remanufacturer, started testing the market last month, in a process being run by Barclays.That company was being marketed on around USD 25m EBITDA with margins around 17 percent.


Dover Corporation engaged William Blair to hive off of its Warn Industries unit, another aftermarkets provider. The business is being marketed at USD 18m in run-rate EBITDA.