Stimulus Spending Missing The Mid Market PDF Print E-mail
Written by Stuart Morley   
Sunday, 02 May 2010 17:38
While many large companies can access deep pools of capital and debt, even in these tough times, mid market companies are faced with somewhere between a few expensive options or no options. The media has hyped the government bailouts of large banks and large auto companies as helping turn the economy around. However in US and, to a less extent, Canadian mid market many companies are still finding it tough refinance.
by StuartMorley


While many large companies can access deep pools of capital and debt, even in these tough times, mid market companies are faced with somewhere between a few expensive options or no options. The media has hyped the government bailouts of large banks and large auto companies as helping turn the economy around. However in US and, to a less extent, Canadian mid market many companies are still finding it tough refinance.

Approximately 40% of mid market companies have a balance sheet problem. They have too much debt. In the short term they are securing bank support to move outside certain covenants, extend amortization levels and interest payment relief. However the longer term options include finding more equity, accepting slower growth to conserve cash and accelerating debt repayments.

Real estate can be a blessing or a curse from a valuation perspective. Real estate that has held its value as part of the business can make it easier to refinance using the real estate as collateral. However a business with real estate that has falling values can mean the bank refuses to refinance the business.

Falling debt capacity is another challenge for mid market companies where the shareholder capital in the past could represent 33% of the total capitalization and now bankers are refusing to support companies unless the shareholder capital represents at least 45% of the total capitalization.

Private equity pools traditionally hold investments until the markets are hot before exiting their portfolio companies. Many companies that were sold at 6 to 9 times EBITDA (earnings before interest, taxes, depreciation and amortization) are now faced with the prospect of an exit at 3 to 5 times EBITDA and so they are holding their investments until the market returns to higher EBITDA multiples. Shareholders of mid market companies are also doing the same which means the mid market merger and acquisition market is not expected to come back quickly.

The bankruptcy rate in the US has risen by 35% in 2009 and so the overall business climate in the mid market is still in a state of shock. Many of the bankers who provided DIP financing (a life raft to companies in Chapter 11 in the US or CCAA in Canada), are no longer involved, making it harder for companies to both secure bankruptcy protection or to exit from bankruptcy.

The glass is half full! A study of mid market companies by GE Capital in 2010 found that 54% of CFO's predicted their profits would rise in 2010 even though they have a negative view of the current state of the US economy.

Cross border activity will be interesting as Canadian mid market companies are taking advantage of the better credit situation and the strong Canadian dollar to make more investments in the US while US companies are finding it easier to export more to Canada.

The jobless rate (US 10% and Canada 8.5%) will not come down significantly until the 40% of mid market companies that are still hampered by credit restrictions start to grow and according to US Census data these mid market companies represent 28% of the jobs.

Despite of the better news in Canada and the US, many mid market companies are talking about the new normal and changing the way they will have to do business yet they face another storm if they are not able to roll over significant portions of their term debt in the next few years.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Stuart Morley MBA and his firm BRSJUMP are recognized experts in refinancing mid-sized businesses. The firm has offices in Scottsdale, Arizona and Toronto, Canada. Go to his website for more information including video clips, articles and order his recently co-authored book (with Gordon Griffiths and Morris Slemko) called Weather the Storm. Survival Guide for Mid Market Organizations.