The Current State of the Debt Capital Markets

My Guests

My guests today are Cory Kaiser and Timothy Eaton, Vice President & Associate Vice President respectively within TD’s Commercial Banking Group. Between them, they have over 40 years of experience lending to lower-middle market businesses not just to finance their acquisitions, but also to finance growth initiatives, day-to-day working capital needs, and leveraged recapitalizations, to name a just few. Cory and Tim have worked closely with countless sponsors to help them consummate the purchases of small businesses, including with search funds.

This episode attempts to directly address many of the questions that I’ve been asked over the past 6 months related to the current state of the debt markets: How and why pricing has increased, how credit availability has evolved, what risks banks are no longer willing to underwrite, how their diligence processes have changed, how non-price terms have evolved, and countless others.

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Specific Questions and When They’re Asked

(3:22) Give us your take on the current state of lower-mid-market credit, and the major differences in the market relative to 12 months ago

(8:10) Are your observations equally applicable to larger companies operating in the true “middle market”?

(9:31) How are lenders thinking about the quantum of debt that they’re willing to offer to partly fund buyout transactions?

(13:07) How about covenants? Are lenders getting more restrictive on covenants as they look forward six to 12 months?

(14:03) We know the base interest rate has been increasing. What about the spread relative to that base rate that you’re offering to your clients? How has that changed?

(16:19) What is an acceptable percentage of free cash flow for a company to dedicate solely to debt service? How would that number change if you think we’re heading into a recession?

(18:20) What has changed with respect to the types of analysis, or model cases, or base case assumptions that you want to see from prospective borrowers?

(20:23) Over the past year of funding SMB buyouts, what percentage of the total capital structure has been represented by debt? How do you expect that to change moving forward?

(22:17) How should a first-time SMB buyer think about how much debt to put on a deal, especially in today’s environment?

(25:51) Among lenders, how competitive is the average lower-mid-market deal in this market? How is that different from 12 months ago?

(29:52) How do banks think about the inclusion of seller financing in any given buyout transaction? Are there any instances in which you’d push back on a prospective purchaser looking to add a VTB into a deal?

(32:25) In this market, how should prospective purchasers think about the relative merits and risks of securing fixed rate v. floating rate debt?

(35:19) Can you explain the role that a bank’s credit committee plays in any given financing process?

(37:26) Are there any questions that your credit committee is asking you now that they weren’t asking you 12 months ago?

(39:33) Are there any industries or business models that your credit committee would have funded 12 months ago, but are no longer willing to fund today?

(41:17) What percentage of deals get final approval from the credit committee on the exact same terms as were reflected in the term sheet?

(47:20) What actually happens when a borrower trips a covenant? What should a borrower do if they suspect they might trip a covenant in the coming weeks, months or quarters?

(51:20) How should borrowers think about choosing between multiple term sheets that are presumably more similar than they are different?

(54:49) How has your view on lending to software/technology businesses changed, if at all, over the past 1-3 years?

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