Mid-Market Deals Feel The Credit Crunch, Too

Monday, August 13, 2007 — LBO Wire
Paul Ziobro
Middle-market buyout deals are experiencing the same problems raising debt as their multi-billion-dollar counterparts, with a number of smaller deals having trouble securing debt at the desired prices and some deals being pulled altogether.
At least 10 outright buyouts, dividend recapitalizations or debt refinancings are having a difficult time finding buyers for their paper, according to several middle-market lenders.
Among the deals having trouble are MidOcean Partners' buyout of Bushnell Outdoor Products Inc., a maker of binoculars, telescopes and other optical equipment; as well as Graham Partners' planned purchase of Schneller Inc., a maker of decorative laminates, these people said.
Dividend recapitalizations of companies like Escort Inc., a maker of radar detectors backed by Falconhead Capital LLC, and Stolle Machinery Co., a maker of parts for canning equipment backed by Littlejohn & Co., have been pulled altogether, several people said.
The buyout firms mentioned either declined to comment or couldn't be reached.
The credit crunch is similar to the problems that some mega-buyout shops are having raising debt to fund multi-billion dollar deals, such as the buyouts of First Data Corp. and Chrysler Corp., as problems in the subprime mortgage markets have essentially frozen the debt markets. "The middle market is not immune to the problems in the large-cap market," said Walter Owens, president of CIT Group Inc.'s corporate finance group.
Traditional mid-market lenders, like collateralized loan obligation funds, or CLOs, are reducing their commitments, while banks and other lenders are demanding more conservative capital structures and better prices. "Leverage is moving down a bit, while cost is moving up," Daniel Duffy, co-president of the corporate finance group at CapitalSource Finance LLC, said.
Lenders say the upper limit for digestable debt ratios is now around 4.75 times earnings before interest, taxes, depreciation and amortization, down from some 6.2 times Ebitda in the second quarter, according to Standard & Poor's Leveraged Commentary & Data. The new level is more in line with multiples seen in 2005 and 2006.
There are also tales of lenders getting cold feet as deals near closure, either pulling out at the last minute or demanding changes to pricing as the overall credit markets remain in flux.
"The markets aren't shutting down, although you are seeing lenders looking for a little more yield and less willing to take on too much leverage," Todd Kumble, a managing partner at investment bank SPP Capital, said. "They have really become much more particular about which companies they'll lend to because their liquidity is more restrained right now."
Buyouts like Bushnell and Schneller are likely to go through eventually, people familiar with the matter say, but at more favorable pricing for the buyers of the debt. That equilibrium will take some time to establish, as will other distinguishing features of the changed credit markets."
It's all too new," said David Yewer, a managing director at lender FirstLight Financial Corp. "So we don't know exactly how things are going to shake out here."
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