According to S&P IQ research, U.S. companies are able to borrow more than at any time during the last seven years. Senior debt multiples (Debt/EBITDA) could top 5x this summer. The previous high was 4x and even less during the recession. Not since 2007 have banks given such leeway. Banks have also loosened formerly more restrictive covenants. Today’s covenant-lite issuers are finding they have to compete more for quality loans, hence the easing. Covenant-lite loans open the door for more lending by allowing new borrowers access to more third-party debt, higher leverage ratios and lower interest-coverage ratios. When businesses can borrow more for less they tend to invest the additional funds in capital projects, stock buy-backs, dividends and M&A. And the sharp increase in M&A activity in 1Q14 supports that trend.
Private equity funds, in the meantime, are still looking to find and invest in high-quality solid-cash-flow companies and are paying up big time. According to FactSet, M&A buyout deal premiums for the three months ending May 2014 topped 56%.
My point in this summer bulletin is simple. Add all these data points and index measures together and the 2014 uptrend is clear. Increasing confidence, increasing demand, increasing consumer spending all translate into increasing valuations for small and middle-market businesses this year. So if you’ve been waiting to enter a better market to sell or buy a business, evaluate your options carefully as the heat of summer looks pretty cool for the middle market this year.
This article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC.