Over the past 5+ years the lending environment has been very favorable to sponsors and has, in our experience, led to a tendency to focus more on equity as the proverbial "long pole in the tent" when securing financing for a deal. Generally we have found that once equity is secured there are multiple debt providers excited to fund a transaction and they have been willing to negotiate on most everything from pricing to covenants.
Over the last few months as interest rates rise and a impending recession (magnitude to be seen) sits on the horizon we have seen this dynamic begin to change. Debt providers have tightened their criteria and many all but left the market in the fourth quarter, giving those who remained significantly more leverage in negotiations. Pricing has increased, leverage is down, covenants have tightened, and room for movement on initial term sheets is minimal.
I'm curious to hear from other searchers:
- Have you changed the timing on when you bring in debt providers into a deal? Are you involving them prior to IOI or LOI to "bless" your structure before making an offer?
- Have you reset expectations for how much leverage you can write into a deal?
- Are you still taking as much leverage as is offered or have you reduced how much you will take as you weigh interest burden or other factors?
- How are you navigating tightener covenants?
- Does the current debt environment impact how you think about funding acquisitions? Does this make you rethink a rollup strategy?
- What other considerations are top of mind in the new lending environment?
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by a searcher
from Gonzaga University
in Denver, CO, USA
in Denver, CO, USA
3yrs ago
Is Debt in the Driver Seat?
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by a lender
3yrs ago
from California State University, Sacramento in Seattle, WA, USA
from California State University, Sacramento in Seattle, WA, USA
Garret what size ebitda deals are you working with? Are you a traditional searcher using conventional non recourse debt or self funded using the sba program. Do you have institutional sponsors behind you or more of a solo strategy? Or other. I think answers might vary depending on your debt track.
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by an intermediary
3yrs ago
from The University of Chicago in Chicago, IL, USA
from The University of Chicago in Chicago, IL, USA
I simulated few scenarios on my financial model if interest increases from 5 to 8 %. I used 5 yrs. amortization and had a line of credit. I used my "base case" that I use during demonstrations. Here are the results (rounded for simplicity) on the "base case". Actual results will vary for each business case.
Base Case Price X, and IRR 35%, no change in forecast.
1) Price X will reduce by 10% to maintain 35% IRR,
2) Price X can be preserved, and IRR maintained at 35% by increasing amortization from 5 years to 6 years.
3) Price X can be preserved by increasing equity infusion by 20%, but this would reduce IRR from 35% to 30%.
I used redacted. Above simulations took me 5 minutes. Results will vary for each business. My intent here is to show approx. impact of interest rate increase, and few ways to mitigate the impact.
Base Case Price X, and IRR 35%, no change in forecast.
1) Price X will reduce by 10% to maintain 35% IRR,
2) Price X can be preserved, and IRR maintained at 35% by increasing amortization from 5 years to 6 years.
3) Price X can be preserved by increasing equity infusion by 20%, but this would reduce IRR from 35% to 30%.
I used redacted. Above simulations took me 5 minutes. Results will vary for each business. My intent here is to show approx. impact of interest rate increase, and few ways to mitigate the impact.
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