It boils down to something I pointed to before. A “bait and switch” tactic on the lenders part should be avoided at all costs. I’ve recently seen an asset-based lending structure for a local portfolio company coming out of smaller bank in New England. The bank was very aggressive in trying to land the deal but once they got into the tent and documents began to be circulated, covenants were tighter and the borrowing base was cut back. If you’re a lender, you’re better off spending another week in committee to get the right structure in place and communicating what the issues are versus changing things at the last minute when everyone is pressed to close.
ABL Advisor: From what we gather, relationships still factor heavily in these lending relationships and in terms of the ultimate outcome. Is this an accurate assessment?
Roche: It is. I think the most successful wind downs are the ones where everyone in the capital structure is working together. Even if the private equity firm – and I’m speaking from the mezzanine side here – isn’t willing to put any more money into the deal, sometimes we will pitch in more to save the situation. I like to see the bank step in and work with us to muddle through the issues. There are lenders who are very supportive in that regard. The folks at Cole Taylor are an example – we’ve met everyone on their team and we can really tell that they understand the business. They have done a fantastic job for us.
On the other extreme, I’m always wary when a team of seasoned lenders leaves an established institution to set up shop with a $4 billion to $5 billion local bank. That might be fine since you know the people. But as a private equity firm, you really need to think things through a bit more. You need to make connections with the senior people at that new institution because if you don’t you could be facing disaster. Here’s a true story … we had a savings bank here in the Northeast that helped us finance the acquisition of a very well-known consumer oriented food company. We worked with a well-known private equity firm and the team that had sponsored the transaction within the savings institution had come out of a large bank. There was a decent real estate component to this deal and the facility happened to be adjacent to a very well-known university.
Between the assets, the brand and everything else, it was worth about $15 million. We had somewhere between $2 million and $3 million in the deal, the equity sponsor had about $5 million and the bank had the balance. When the company got into a bit of trouble, our firm and the equity sponsor put money in and developed a recovery and sale plan, but the bank got nervous. And lo and behold, the people at the institution had left that bank to pursue another opportunity. The loan was taken to the bank’s board and the board said, “Look at this real estate … it’s worth a lot of money. We can shut this company down and sell the real estate.” We didn’t believe that they would go to this extreme but they did. Why? Because there was no longer a relationship … it was merely a one-off deal for this institution. That was that and we wound up with nothing.
That, of course, was a unique situation. But whether you’re a mezzanine lender or a private equity sponsor, you have to ask yourself: What is this institution all about? Are they going to have the stomach for three bad quarters? Will they do an over line for three months while the company figures things out? And sometimes, it’s a challenge.
ABL Advisor: In closing, do you expect the same level of activity for firms similar to yours for the remainder of the year?
Roche: Looking out assuming things stay where they are now, I think it will continue to be a very aggressive market. The banks are flush with cash and the private equity firms are flush with cash. There’s a whole lot of capital banging around out there … yes, things will remain quite aggressive for the remainder of this year.