News Flash: Banks & Sponsors Not Filing For Divorce

September 25, 2007

Yesterday I read an abstract in a competing publication that read as follows:

The twilight struggle between banks and buyout shops over financing commitments has produced tense moments and obscure legal quibbling. But so far at least, the parties are still talking.

Wow, the parties are still talking? Thanks for the revelation.

I know, everyone likes a good teaser, but this is pretty obvious stuff. While the power in the bank-sponsor relationship has clearly shifted back to the lender in the wake of the summer credit crunch, did anyone seriously think that banks would start ignoring or alienating the private equity community?

We’ve been saying for months in this column that while the world of financing has undeniably changed (i.e., the death of covenant-lite loans), deal flow is not going to dry up. There’s simply too much money to put to work, too many companies still for sale and—drum roll, please—too many reasons for lenders to stay active in the M&A market.

For one, lenders don’t earn fees unless they actually lend money, and M&A deals are typically more lucrative for banks than the average loan. What’s more, as the market shifts, many of the opportunities are actually safer and more lucrative now than they were a few months ago. So why jump ship now?

Last week some of my editors and I met with Chris Williams, Managing Director at Madison Capital Funding, a middle-market lender, and I jokingly asked him whether he thought the sky was falling. His face lit up as he proceeded to explain how his firm was busier than ever, had expanded its healthcare effort over the summer and was absolutely committed to working with financial sponsors on sound transactions.

Part of the reason for his optimism is that the recent credit hiccup has taken some of the opportunistic institutional lenders out of the equation. As such, financial sponsors don’t have as many financing options as they used to. If that means some of the crazy multiples and borderline irresponsible deal flow gets weeded out of the market, that’s not such a bad thing.

The other reason banks won’t abandon the private equity market is for the simple fact that, no pun intended, they don’t want to burn bridges. Over the past few years, buyout shops have been an important source of revenue for the lending community. And even if the stock market were to decline, well-capitalized sponsors—especially those comfortable with turnaround situations—will have plenty of banks to call on.

** We’ll be discussing how to survive in the post-froth M&A environment at The New Rules of M&A, a one-day event on Dec. 10 in New York. Click here for more information: http://www.sourcemediaconferences.com/NMA07/