May/June 2010

What It Takes to Get the Deal Done

In late March, Cole Taylor’s Michael Sharkey participated in a panel of M&A experts at the Association for Corporate Growth’s Capital Connection in Atlanta. The panel spoke to the challenges of getting deals done in the current marketplace. We asked Sharkey to bring the essential points of this panel to ABF Journal readers.

While debate over what caused the Great Recession rages on, no one can argue with its far-reaching impacts. Beginning in late 2008, signs of a classic recession began: falling gross domestic product, declining capital investments and plummeting consumer demand. By the time the first signs of recovery appeared, unemployment soared to more than 10%, the financial markets were seriously shaken and the market for residential housing had declined sharply. Many seasoned business observers noted that the roughly 18 months of the Great Recession were unlike anything seen since the Great Depression more than 80 years ago.

Troubled times and uncertainty are always a cause for concern in the business community but can present opportunities as well. The market for asset-based financing has been a prime example of the challenges and also the opportunities presented by economic uncertainty.

The serious blows taken by the financial services industry presented several challenges to asset-based lending. Liquidity markets were nearly frozen for an extended period of time, making even the most attractive deals difficult to bring to a close. Even deals with a willing buyer and willing seller were, in some case, undoable. Many asset-based lenders left the marketplace, as they were acquired, stopped asset-based financing entirely or went up-market beyond the scale of many traditional asset- secured borrowers. Rapidly growing bank credit losses, bank failures and FDIC-assisted mergers exacerbated the market for financings.

Borrowers also suffered greatly. Sharp drops in sales and revenue of 30% or more were common. The value of securitizable assets declined. As an example, with no demand for increased production capacity in the market, equipment appraisals were extremely low. All of these issues and more made it difficult to forecast a borrower’s potential capacity for debt and, in some cases, even if the borrower would survive the downturn.

Despite these challenges, opportunities still presented themselves. Well-positioned and well-managed companies survived and, for the very best, even thrived. Those companies able to successfully close financing deals oftentimes exhibited similar traits. They tended to be historically profitable and were able to return to profitability reasonably quickly, or were able to return to a positive cash flow, despite the impacts of the recession. These companies — not surprisingly — had solid, experienced management teams that were able to react to the downturn. In many cases, those management teams had contingency plans in place, ready to deal with whatever the economy threw at them. Those successful companies were able to show lenders that they could operate productively in a difficult environment even without relying on sales coming back in a meaningful way.

Opportunities also were present in sectors that held up better than others, such as energy and food. Larger, broadly syndicated ABL facilities presented opportunities for profitable buy-in as big-bank turmoil and gridlock enabled a larger number of institutions to participate in larger, safer credits that normally would have been closed off to smaller organizations. The refinancing market was stronger, leveraged buyouts nearly stagnant.

One of the overarching stories of this recession has been the difficulties that small- and medium-sized businesses have faced when trying to obtain credit. Entire government programs were developed solely to ease the constraints on credit for that key segment of the marketplace. While credit has begun to flow more freely, those difficulties are likely to continue to some extent as the economic recovery expands. However, well-positioned and well-managed companies will find financing available to them as they continue to grow. That growth is and will be key to bringing the American economy back to full health.

Michael Sharkey is president of Cole Taylor Business Capital.