BSL Backstopping to Increase Certainty and Optimize Execution
One of the more significant changes for private equity sponsors in the upper middle market has been the rapid increase of lending funds capable of providing credit at a scale that rivals the lower end of the broadly syndicated loan (“BSL”), or Term Loan B, market. Traditionally, sponsors and borrowers look to the BSL markets when a facility reached the $200-300mm level.
SPACs Under Stress
While 2021 inflicted market discipline and valuation contraction upon SPACs, 2022 is set to bring further challenges. Degrading unit economics on account of rising labor and input costs combined with rising interest rates will pressure many companies both “above and below the line.”
With signs that the COVID-19 pandemic may be in the rear-view, private equity sponsors and lenders have shifted focus to underwriting new transactions. The 4Q of 2020 was one of the busiest on record for new sponsor acquisitions, but many of the sponsor acquisitions involved companies that were not materially negatively impacted by COVID-19. The question of COVID-19 adjustments to underwriteable EBITDA was less critical. Now that many of the new acquisitions involve targets that were significantly impaired by COVID-19, adjustments to financial performance in new loans have become more important.
Special Purpose Acquisition Companies (SPACs) Part 1
Special Purpose Acquisition Companies (SPACs) have been the center of the capital markets stage, and with good reason. Private equity firms, hedge funds, and other financial institutions are looking to SPACs as a flexible and efficient way to acquire companies. On the other side of the equation, target companies see SPACs as a simpler path to the public market, with enhanced valuation certainty.
Portability in Sponsor-Backed Acquisition Finance
Capital structure “portability” provisions, which allow a borrower’s loans to remain outstanding despite a change of control event, may be coming to the middle market in 2021. The acquisition finance landscape post-COVID has been marked by intense competition – perhaps more intense than pre-COVID. As negotiating leverage has tipped in favor of private equity sponsors, more lenders are giving up their rights to have loans automatically repaid if the borrower is acquired.
Debt Covenants Post-COVID-19
As COVID-19 continues to interrupt everyday life across the globe, lenders have been feeling the impact on their borrowers. After a long benign credit cycle, many lenders saw a significant uptick in covenant breaches, waiver requests, and defaults on deals originated pre-COVID.
Middle Market Private Equity: Where Do We Go From Here?
Closing in on one year since COVID-19 first appeared, uncertainty has been, and remains, a constant theme. The broader economic picture seems tenuous at best, but M&A activity rebounded strongly in the last quarter of 2020, with all signs pointing to further resiliency in the period ahead. Still, while transaction volumes have recovered, it may be a long time before we see a return to some sort of pre-pandemic normalcy.
Doing Business – and Doing Deals – in the PPP Era
While most of the risk resides with PPP borrowers, there is also a concern among lenders, whether real or imagined, that the SBA might refuse to honor its guarantee if a PPP lender errs in authorizing transactions that are below change-of-control thresholds requiring SBA consent. This somewhat amorphous concern has led to a heightened level of lender scrutiny across the board, introducing delays to the consent process.