Mid-Market Can’t Escape Credit Crunch

March 10, 2008

I hate to be the one to say it, because I don’t like being the “downer," but there’s little question now that the credit crunch is impacting the middle market. Up until recently, industry pros have stayed relatively upbeat in the face of the market downturn, pointing out that deals were still getting done and the mid-market wasn’t as vulnerable as the large market. While both of those things may still be true, the confidence in those statements appears to be waning. And as I troll for deals every week worthy of putting in this column, I’m noticing fewer deals getting completed.

There’s no doubt that the scarcity of debt in the middle market is a big part of the reason. Hedge funds, who financed numerous transactions before the credit crunch, are getting squeezed by the banks. Moreover, Lehman Brothers estimates there will be $30 billion to $35 billion in new CLO issuance in 2008 — a 60% drop from 2007 levels. Yes, while mid-market CLOs have avoided the downgrades of their bigger counterparts, their outlook is clouded by the broader trends in that space. Deal volume for the first two months of 2008 has fallen to $147 billion to $308 billion over the same time period in 2007. “There are fewer deals making it out of the gate across the board, it’s just harder to get financing, even for healthy companies,” says one private equity player.

However, one group is feeling the positive effects of less debt being available: traditional middle market lenders. Those that are able to still lend are finding themselves busier than ever. As one private equity player recently said to me: “I learned to be nice to everyone, because you never know what tomorrow is going to bring in this business. It’s certainly a quick turn of events that the lenders are now able to choose between us, not the other way around.”

Indeed, according to most traditional lenders I spoke with, it’s gotten much easier to sell their products to private equity firms and the proverbial ball is really back in their court.

The question is how long this will last. I do agree that the middle market remains strong relative to the other market segments, but there’s no question the credit contraction has brought about change. Let me know what you think.