NEW YORK, Sept 3 (LPC) - US middle market lenders are optimistic that post-Labor Day dealflow will be steady and could likely accelerate heading into the fourth quarter.
Undeterred by the early August volatility that briefly set wider financial markets ablaze, prompting many economic observers to brace for an imminent recession, middle market participants are taking a more balanced view. Pointing to solid lender and sponsor pipelines, they are confident about deal activity for the remainder of the year.
“Usually deal activity post-Labor Day and heading into the 4Q does pick up, and we are encouraged by our pipeline,” said Michael Ewald, global head of private credit at Bain Capital Credit.
Karen Davies, managing director and group head of Huntington Bank’s private equity banking vertical, echoed a similar sentiment with respect to private equity-backed transactions: “Sponsor pipelines are robust. There is still supply that needs to push through.”
Still low interest rates combined with intense competition among lenders means credit remains widely available at a low cost of capital and is expected to easily meet the borrowing needs of corporate borrowers and financial sponsors alike.
“I think we could see more urgency to get ahead of whatever is coming down the road,” said Davies. “As we near the end of the cycle the choice is becoming sell now or ride out the cycle. We may see a flurry of baby boomers selling.”
Ship repair services company Vigor Industrial will meet investors at a September 4 bank meeting in New York to launch a US$500m term loan B. The loan backs the Portland, Oregon-headquartered Vigor’s acquisition by Carlyle Group and Stellex Capital Management, sources said.
Bank of America Merrill Lynch leads the loan, joined by arrangers BNP Paribas, Credit Suisse, Citizens Bank and Mizuho.
Private equity firms Carlyle and Stellex are buying Vigor and merging the company with MHI Holdings, a ship repair, maintenance and ship husbandry services company owned by Stellex, according to a July 25 statement. Carlyle will become the majority owner of the combined company.
Specialized consulting services firm ALKU is also slated to tap the loan market in early September with a new US$248m acquisition credit facility backing the company’s sale to financial sponsor FFL Partners. The deal is slated to launch in September.
The funding includes a US$30m revolving credit facility and a US$218m term loan B. Administrative agent Societe Generale leads the deal joined by SunTrust on the right.
The Andover, MA-based company provides services to technology, healthcare IT, life sciences and government end markets.
Merger and acquisition-related financings are widely expected to lead this fall’s pipeline, including add-on acquisition loans as sponsors drive growth and scale via buy and build strategies this year.
Despite an abundance of capital, the endless exchange of trade war and tariff rhetoric along with the risk of any number of potential geopolitical flareups has solidified a sense of discipline among investors.
“Smaller deals in general are finally starting to see adults coming back to the table,” said Tim Gramatovich, chief investment officer at Gateway Credit Partners, a division of B. Riley Financial. “Floors, addback limitations, cash flow sweeps, etc are all returning. Is it a trend or just a blip? Given what the curve is telling us about global economic activity, I’d say it may be the start of better terms for investors.”
Opportunistic transactions such as dividend recapitalizations and loan refinancings are therefore likely to face more scrutiny compared to accretive acquisitions or new buyouts. Cyclical companies are also drawing caution from increasingly selective investors.
“The investor base is waking up. We’ve seen some pushing back on terms and pricing on more cyclical credits based on the mood overall,” Ewald said.
Overall though lenders are upbeat about the remainder of 2019, noting that some middle market businesses are still showing expansion, and some companies have sidestepped the trade and tariff impact by adjusting from a supply standpoint. They also point to consumer confidence as a good indication that there is more room to run.
“Business spend is less, but two-thirds of the economy is driven by the consumer and they are hanging in,” said Ewald. (Reporting by Leela Parker Deo. Editing by Michelle Sierra) ))