Saturday, March 14, 2009

Panel: Middle Market LBO and Changing Capital Structures

The panelists were seeing transactions in the middle market, but these transactions had some sort of distress component. The insight here was about the ownership structure of mid market firms, which had entrepreneurs with strong stakes. Entrepreneurs running firms with strong fundamentals did not have much of an incentive to sell. Quoting a panelist- why sell when you can make as much money and still own the company?

Some numbers from the end of Q1:
The panel had seen loans being sold at a discount of upto 90%. LIBOR floor was at 3.5% and mezzanine coupons were at 15% to 17%. Debt multiples, in terms of EBITDA, for first lien were around 2.5, for second lien, around 3.3 and for subordinate debt, around 4.3. Mezzanine debt had more senior debt than ever.

Transaction multiples had held, however, leverage multiples had gone down, while equity component had gone up. The more complicated structures cause deals to take longer to pull off.

Banks were interested in private transactions, as they provided rates better than LIBOR + 500 bps, and were delivering via mezzanine and equity.

There was an interesting demonstration of over-equalization of seller and buyer expectations with supply of capital as a key factor. It would be interesting to see a similar analysis with supply of transactions as the key factor.

It was pointed out that transaction multiples had held:
1> Is ita real estate like effect in the relatively less liquid middle market where the selling price of the last house sold on the block sets the price for future sales? Or.
2> Are mid market firms with capital left to invest crowding around fewer transactions?
3> Banks investing in private transactions would be an important source of liquidity- how many of these investments were really follow up transactions to investments already made?

What do you think?

The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.

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