Steve Carr, corporate finance director for debt advisory of BDO London, commented in a client communication last month that BDO has ‘witnessed lots of instances where debt funds have provided solutions that clearing banks have been unable to match (albeit this comes at a price).’ Carr points to the funds’ business model, which only rewards the raising and deployment of capital. The result is sometimes ‘more innovative structures.’

This trend must be considered when analysing liquidity and WACC issues for middle-market enterprises. For instance, as Carr comments, ‘post-credit crunch, the majority of debt funds targeted businesses with EBITDAs in excess of £8m. As this space has become more congested, we have seen more lenders actively targeting companies in the lower mid-market with earnings of between £3m and £5m EBITDA.’

Select smaller companies have been able to negotiate terms that keep their cost of debt in line with larger competitors. Carr notes specific opportunities for smaller companies to push:

• Permitted releveraging, where a borrower agrees with the lender that he or she can take on more debt as the business grows; and
• Much looser covenant controls.

He also comments that debt funds tend to act rationally and predictably, even in difficult situations such as stressed refinancing and amendment processes. This ‘enables a smoother and typically quicker negotiation between stakeholders.’

Debt deal teams are also staying in their jobs longer, reducing a common problem for owners and management who suddenly need to reeducate their lenders—a frustrating experience that adds significant risk to smaller-company performance and survival.

Not every business is seeing increased liquidity from debt sources, but business valuers should note Carr’s summary when assessing this risk area. If you accept this argument, it’s logical to conclude that the discrepancy between large- and small-company multiples could be decreasing, even in this destabilised period.