Outlook 2012: Mid-market lending

Capital-constrained banks will continue to pose challenges for mid-market companies in need of financing next year, says Monroe Capital’s Ted Koenig.

Mid-market lending volume will likely remain at reduced levels in 2012 due to capital-constrained banks and global economic uncertainty, according to president and chief executive of Chicago-based Monroe Capital, Ted Koenig.

“Until there’s more stability in the economic outlook, it’s going to be hard,” he said.

While mid-market lenders such as Monroe have seen a significant spike in demand for financing as a result of larger banks that have retrenched, there remains a dearth of financing for mid-market businesses in need of capital.

“There’s no way that private lenders and asset managers can step up and fill the void left by the banks in the leveraged loan market,” he said.

One silver lining for mid-sized businesses has been lower levels of volatility compared to the higher end of the market, Koenig says.

Ted Koenig

“The advantage is the mid-market isn’t subject to the volatility of the larger markets and the rapid price movements caused by Europe or Greece or anywhere else,” he said. “The mid-market is pretty insulated from these global economic issues.”

One new development in the lending space in 2011 was increased popularity of unitranche debt, which combines traditional senior and junior debt terms in a single senior facility. Rather than having a separate interest rate for senior and mezzanine debt, the unitranche structure employs a single blended rate that averages out the cost of the two forms of capital. The simplicity of working with a single party can also help close deals quicker, an attractive characteristic for firms that value ease of execution.

A rise in demand for unitranche loans, however, has had an impact on both traditional senior and mezzanine loans, according to Koenig. 

“The mezzanine market will continue to feel the effects of the unitranche product for the next 18 to 24 months,” Koenig said.

While Monroe has had a “much stronger” pipeline of deals in 2011 compared to 2010, according to Koenig, the amount of mid-market lending that takes place next year will rely heavily on overall mid-market transaction volume, which faces significant challenges.

“I think private is going to be a much more difficult business for 2012,” Koenig says. “There are a lot of headwinds. We have a very slow growth economy so we have a limitation on revenue expansion. We’ve got raw materials prices increasing. We have a lot of pressure on margins and you don’t have private equity multiple expansion. So private equity is going to have to operate their way out of this next phase as opposed to finance their way out this next phase.”