When Acquisition Financing Lenders Fall Over and Go Thud

Posted on: February 15th, 2024


Scalability is an important feature of an acquisition financing lender, especially for companies that are acquiring rapidly and rolling up an industry. Due to the high volume of acquisitions, it is impossible to finance a roll-up with a new loan or lender for each deal. Acquisition financing facilities in the form of delayed draw term loans and accordion facilities are the norm to allow companies easy access to follow-on acquisition financing.

Often the acquisition financing lender can commit to providing a total facility that is 2+ times the size of their original funding, which gives the deal sponsor great financing credibility in the M&A market. This approach depends on the lender’s continued ability to fund deals under the acquisition financing facility structure. Sometimes, the lender falls over and goes thud and for strange reasons is unable to fund additional acquisitions. This creates a big problem for the sponsor because their credibility in the market is based on their ability to close. When their acquisition financing goes thud, the sponsor must find other ways to close their deals. Sometimes this occurs for legitimate reasons where the lender feels the deals are too risky or the base business is underperforming.

If the company is struggling and the sponsor wants to acquire their way out of a performance hole, an acquisition financing lender can legitimately abstain for good reason. However, often the falling over is caused by lender internal issues which can range from other portfolio problems to human capital issues which manifest themselves in a lender pullback. When an acquisition financing lender has a problem loan, they tend to extrapolate this issue to other healthy loans in their portfolio. Even though each company is unique and represents a discrete investment, credit officers often create new ways of assessing risk and overshoot in their management of that risk. This can mean trouble for certain industries leading to a lender decision to reduce their exposure and withhold future advances to the company.

At a time when the company should be borrowing more to make acquisitions, the lender covertly decides to not advance and manage down their exposure. This creates a huge access to capital liquidity squeeze for the sponsor which is hard to navigate around. Sometimes the lender has grown rapidly and raised a much larger fund but lacks enough experienced, seasoned people to manage new loans in this new fund. This leads to junior personnel playing an outsized role in the capital allocation decisions which leads to subpar lender decisions and constriction of capital access to the borrower. The most important thing in choosing an acquisition financing lender is to make sure you have a strong, seasoned lender who has been through multiple credit cycles. These types of lenders have strong platforms and are less likely to fall over and go thud due to internal lender reasons.