‘Cash Is King Again.’ What Coronavirus Means for Mergers and Acquisitions.

By Luisa Beltran March 23, 2020 6:15 am ET

The private credit markets are functioning but financing for new middle-market deals is on pause as Covid-19 continues to roil the global economy.

First, the good news. Revolvers, which help companies fund themselves when cash is tight, are being funded, and working capital lines are available, one large market private lender told Barron’s. The bad news? There is no funding available for M&A deals. “There are no new deals to fund,” the lender said.

The pause comes as coronavirus-related volatility has caused M&A in the first quarter to grind to a near halt. Global announced M&A volume dropped 24% to $621.5 billion spread across 8,465 deals as of March 20, Refinitiv said. U.S. announced transactions are showing a more significant drop-off. Volume for U.S. deals has plunged 57% to roughly $203.2 billion for 2,307 transactions. Joshua Thompson, head of leveraged finance at law firm Shearman & Sterling, said the private credit market isn’t frozen, per se. Instead, investors are taking stock and evaluating risk. “They’re looking for value and going through the whole process of repricing risk and taking selective opportunities,” he said. Transactions that are signed and subject to a binding agreement may have little to no flexibility to renegotiate terms, he said. Sellers with deals that were in process, but don’t have a binding agreement, may reassess those transactions and decide whether to bring them to market, he said. The corona-related downturn, which has upended the stock market, presents an opportunity for buyers with cash, Thompson said. He pointed to private-equity firms, which are sitting on a $1.71 trillion war chest. “It’s a classic time to make a lot of money and support great companies and continue to keep those great businesses going if they’re facing temporary or adverse developments,” Thompson said. “Cash is king again.”

One thing Thompson hasn’t seen is a wave of distressed assets coming to market. “We know that is likely to come and that will present another series of opportunities for investors that have been keeping their powder dry,” he said.

Private-equity funds that can do preferred equity or debt with warrants are out “pounding the tables” and telling anyone who will listen that they’re open and looking to put capital to work, one banker said. Private equity is also super focused on figuring out what’s happening with their portfolio companies. Some private-equity firms are reported to have told their portfolio companies to draw down their revolvers. On Friday, the stock market tumbled after New York Gov. Andrew Governor ordered all nonessential businesses in the state to close. The Dow Jones Industrial Average lost 913.21 points, or 4.6%, to 19,173.98 on Friday, while the S&P 500 shed 4.3% to 2304.92, and the Nasdaq Composite dropped 3.8% to 6879.52.

Leonard Klingbaum, a finance partner at law firm Ropes & Gray, doesn’t think the private credit market is on pause but taking a “collective breath.” The difference, he said, is that with a deep breath, there is still movement on deals. With a pause, “pens are down” and parties may delay talks for a period, he said.

Parties are still looking at new deals and lenders are fulfilling existing funding obligations, he said. Klingbaum is currently representing a credit fund on a new deal. The fund, like many other lenders, is still interested in the transaction but wants the time to see how things will work out, he said.

Just like the rest of us.

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