The below summary from SPP Capital Partners can be viewed in full here: http://sppcapital.com
Minimum Equity Contribution
With an increased focus on downside protection, lenders are likely to avoid thinly capitalized deals, especially for sub $10 million EBITDA borrowers. Aggregate minimum of 40% base level equity (inclusive of any rollover) is required for most deals. As leverage levels creep up in excess of 5.00x, 40-50% cash equity (exclusive of rollover) is required. Most lenders discount rollover equity in excess of 20%.
Equity Investment and Co-Investment
Liquidity for direct equity investment (and co-investment) is still quite robust among insurance companies, family offices, credit opportunity funds, and select SBICs. Most traditional mezzanine funds will also provide up to 20% of their aggregate debt commitment as an additional strip of equity. Capital to support independent sponsors is at an all-time high, with new funds created exclusively to support independent sponsors. Promotes and carry will vary depending on the role the sponsor plays post-closing and how much, if any, of their own equity is deployed. Most carry provisions will contain performance contingencies to enhance the initial promote. While structures differ based on the circumstances of each deal, most investors are willing to sacrifice some yield for the liquidity preference.
Recap Liquidity
Unsponsored dividend recapitalizations are running into greater headwinds given larger macroeconomic concerns. While circumstances will dictate each particular case, as a general rule, an unsponsored dividend recapitalization for more than 2.00x LTM EBITDA will be more difficult to execute. Recapitalizations combined with an accretive use of capital (i.e.-acquisitions, growth capital) or share recapitalizations to buy out non-operating shareholders will be better received. For time being, however, liquidity recapitalizations for sponsored deals continue almost unabated.
Story Receptivity
While the market continues to be exceedingly liquid for most issuers, “storied credits,” and lower middle market (<$5 million EBITDA) issuers still face increased scrutiny due to a potential credit “down-cycle.“ Most investors will underwrite to a base case that bakes in a 10%-20% reduction in EBITDA, especially for issuers in more cyclical sectors deemed most vulnerable to macroeconomic volatility. While the market is not closed to these issuers, they will be subject to higher pricing, less aggregate leverage (i.e. one turn less of EBITDA) and potentially, some equity upside incentive features. Most bank lenders will consider all committed capital (whether drawn or undrawn) in calculating total funded debt.