Bank Lending Update – March 2009

The lending environment continues to deteriorate despite government support intended to unclog the credit markets. The combination of capital restraints and increased regulatory scrutiny makes obtaining credit from senior lenders extraordinarily difficult and when available will most likely be asset-based requiring 125% collateral coverage.

Asset-based loans are secured by assets (accounts receivables, inventory, net orderly liquidation value of plant and equipment) and based of the company’s profitability and net worth. ABL lenders focus first on the collateral's cash conversion cycle for repayment and secondarily on cash flow. As other lending disciplines are literally in crisis mode, asset-based lending is one of the only viable option for businesses seeking working capital.

Due to the current credit environment (where collateral value has declined), the banks’ effort to retain its existing clients may forced them to require a reduction of a company’s senior debt in order to bring the banks’ undercollaterized position back to par. At renewals, we’ve seen loans modified to accelerate payment, leaving little, if any, capital for companies to fund growth.

If credit is available, pricing has increased substantially and most banks now require a minimum (floor) interest rate. Exhibit 1 shows the pricing of four credits ranging from BB- to BBB. While these loans were obtained from the capital markets vs. directly from banks, the pricing demonstrates the dramatic increase in lending spreads over the last 12 months.

Companies need to be proactive in this environment and address potential refinancing needs well in advance of either loan maturity or potential covenant violations.

In situations where lenders are considering accelerating principle reductions on existing credits, we encourage companies consider raising junior capital (mezzanine or equity) to weather this credit cycle and to better position themselves for growth and acquisition opportunities. Unlike the regulated lending market, mezzanine lenders and equity investors are flush with committed capital to fund growth and acquisitions.

Growth Capital Partners would like to emphasize its continued commitment to assist entrepreneurs and middle-market companies in evaluating any financing/renewal needs during these turbulent times.

Growth Capital Partners is a privately owned advisory firm that focuses exclusively on providing corporate finance and investment banking services to middle-market companies. Since 1992, we have completed in excess of 250 transactions, raised more that $1 billion of institutional capital through private placements and completed M&A transactions with an aggregate value in excess of $4.0 billion. We have attracted an outstanding team of senior and junior professionals who are client-focused. Our professionals are creative, flexible and believe that our clients come first. We are committed to building long term, mutually beneficial relationships with our clients and if we can be of assistance in evaluating liquidity and capital market alternatives, please feel free to give us a call.

We have also attached supporting data related to interest rate trends and middle-market lending.

Middle-market lending rates:

Middle-market lending volume: