Financing for M&A transactions is scarce

Despite the billions of dollars that have been pumped into banks by the U.S. Treasury Department’s Troubled Asset Relief Program (TARP) and related programs, merger and acquisition-related lending in Milwaukee and around the country is difficult to obtain, many of those within the deal community say.

"The TARP money has mostly been used to shore up balance sheets. The lending markets have not improved. Credit standards have not loosened," said Ronald Miller, managing director with Cleary Gull Inc., a Milwaukee-based investment banking and wealth management firm. "I’m working on a $100 million deal right now, and (banks) are not buying debt. They’re only interested in it unless they lead the deal. Banks are de-leveraging now, they’re not buying credit."

The lending market is tough right now because bankers are closely scrutinizing both cash flow and assets when they’re examining M&A deals, said Linda Mertz, managing director of Waukesha-based Mertz Associates Inc.

“In general, business’ cash flow is down and their asset value is down because the used equipment market is in the tank,” Mertz said. “Plus, they don’t know what their projections are going to be like, that’s the biggest thing.”

Banks that are willing to lend for M&A deals are only looking at asset value, not cash flow, said Victoria Fox, managing director with Milwaukee-based Emory & Co. Previously, banks would include an extra portion of financing that would account for cash flow, whether it was explicitly stated or not.

“We used to get what we’d call an air ball, and that’s what has disappeared,” Fox said. “The air ball was the portion of the loan that was not covered by collateral. The banks used to reach beyond (the business’) asset base. That’s not happening now.”

The difficulty in obtaining bank financing has resulted in buyers – both private equity and strategic – putting more equity into deals. On average both private equity and strategic buyers are now required to put about 50 percent of their own cash into buyouts, Miller said.

“It’s basically changing the structure of deals,” Fox said. “On (one) particular deal we are working on now, our sellers are taking a seller note. It would have been an all cash deal in the past. This is making a larger portion of the price in deferred payments… either a seller note or earn-out or the sellers are keeping more stock in the company.”

Banks are even less likely to lend to new customers, Miller, Fox and Mertz said, and are focusing on existing clients now.

“Loan officers are spending less than 10 percent of their time on new loans,” Mertz said. “They’re relationship officers, and they’re trying to figure out what problems they may have.”

To read the full story in the latest edition of BizTimes Milwaukee, click here.

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