In the 1946 classic movie, It's a Wonderful Life, Lionel Barrymore plays businessman archetype Henry F. Potter. A key scene in the movie demonstrates Potter's acumen of acquiring a small town's bank during the infamous bank panics of 1929. Potter to the rescue! Only George Bailey (played by Jimmy Stewart) and his family's Bailey Building & Loan can survive the bank crisis.
The analogy is: If the middle-market represents all the small towns of America, are we facing another bank crisis? As the president and Congress finalize a bailout package for the banking and financial system, it seems that the rest of America doesn't really seem to understand the gravity of the situation. And, shouldn't middle market companies also be more concerned?
As the short-term money markets retreat, the economy hangs in the balance. WaMu's record withdrawals - a classis bank run -- and JP Morgan's subsequent acquisition only add to the drama. Is JP Morgan acting as the current day's Henry Potter with its acquisitions of WaMu and Bear Sterns?
With the overnight Treasury, repo, and commercial-paper markets-among others-contracted or frozen, one can assume that middle-market deals are also likely to seea dramatic decline-at least over the next few quarters. How much?
We will know more by quarter end, which is September 30th, where things stand. For now, everyone is watching the debt markets. According the Wall Street Journal today, "Three-month Libor, or the London interbank offered rate at which banks lend to each other, rose to 3.8% Thursday morning, up from 3.5% the night before."
Meanwhile, we woke this morning to the news that some companies may not even make payroll or pay vendors, let alone make decisions about buying and selling.
With the US government bailout in jeopardy, or at least in its current vision and timeline of the plan, the benchmark 10-year note falling to 24/32 point, or 101 4/32 to yield 3.862%, and the 30-year bond falling to 20/32 point or 101 13/32 to yield 4.415%, it is difficult to say yet what will happen to liquidity, as banks hold on to their cash reserves. Meanwhile, central banks around the world are desperately pumping money into the system.
As we wait on the edge for the next shoe to drop, one thing is clear: cash for funding is unlikely in the immediate future, with the exception of the highest quality of deals, according to Ronald Kahn, Managing Director at Lincoln International, who recently moderated an ACG panel session on credit markets (see last week's Roger's Corner).
For sure, the credit crisis of financial institutions-combined with the current economic uncertainty-has led to fewer sources of capital, according to Lincoln International's findings. In addition, Kahn sums up:
- New loan issuance has declined dramatically over the past year
- Syndicating deals has become increasingly difficult (hold sizes rarely exceed $25 million), resulting in more club deals
- Asset-based lending has become a much greater percentage of total loan volume
- Mezzanine debt is becoming a greater share of the capital structure in LBOs
- Equity as a percentage of total capitalization is at an all-time high.
I'm usually not gloomy in this column; as I am always looking to be optimistic, given my passion for middle market M&A. Let's face it, however: whatever the outcome, it is not likely to be pretty.
In the end, hopefully, like in It's a Wonderful Life, we will all be singing Auld Lang Syne soon.