In mezzanine lending, for example, the competition from banks and other providers is so fierce that borrowers don’t have to give lenders ownership strips or equity warrants, as they did during and after the financial crisis. Having pruned the deadwood, Essex explains, banks are adding assets again and returning to “stretch lending,” where they have no asset coverage but lend based on the business’s cash flows.
Indeed, the middle market has become so competitive overall that there are some deals that firms like CapX just won’t touch. Companies with $100 million or more of EBITDA have a lot of negotiating power now, says Pfeffer. “We have only a handful of [borrowers of that size] because with everyone chasing deals, the structure becomes nonexistent and the pricing is unattractive.”
The liquidity available to corporate credits also means that often a company may not have to choose between a bank and a finance company. On many balance sheets they can co-exist. “There are companies where senior lenders are comfortable to a point and unwilling to take on further leverage, but will allow for additional capital to come into the structure in the form of subordinated debt,” Essex says.
One Point in a Cycle
CFOs also have to look at debt financing from a company-lifecycle point of view. Borrowing private capital doesn’t commit a firm for the long term. Commercial finance providers can provide companies “that extra turn of capital” early in their existence, says Latimer. “If a community bank gives Joe’s Manufacturing $1 million, we may give them $1.3 million,” he says. “That extra $300,000 may mean four extra machines on the shop floor, filling customer orders more quickly and a move to profitability. For that the borrower will pay a higher rate, which is without a doubt a downside, but it will have more capital, and it will use that capital for two or three years. If the plan works, then they can go to a bank.”
Relationships with nonbank lenders, many of whom invest equity as well, can also be long term. Seidenberg says MVC invested $16 million of debt and equity in one company, then sold its equity stake for a $50 million gain. But based on its strong relationship with management, MVC provided the company with a second-lien loan after its exit.
“Due to our role as hands-on advisers, we find ourselves working with management teams time and time again,” says Seidenberg. For some companies, that close relationship with an advisory element may be just what’s needed — and an element they are not likely to get from a big bank.