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Structuring Transactions Post-Coronavirus — COVID-19 Virtual Roundtable


In this week’s COVID-19 virtual roundtable, Axial CEO Peter Lehrman talked to 10 middle-market deal professionals about how they are approaching deal structure during the coronavirus crisis. The discussion focused on obstructions to diligencing and closing transactions, including travel, financial uncertainty, and more. How is risk being shared differently? How are interpretations of financials changing? Is virtual due diligence gaining traction — and is anyone actually comfortable closing a deal over Zoom? 

Thank you to below Axial members who participated in the discussion:


Watch the recording: 


Stream audio only via SoundCloud: 

Show Notes 

Introductions 00:00 – 12:20 

How are perspectives on virtual diligence evolving? 12:20 

  • It can be challenging but you can still check the four C’s of credit (capacity, character, collateral, cash flow) in a virtual environment. White Oak is a very collateral reliant shop across the board and has been able to overcome this in the past 6-8 weeks particularly by relying on virtual diligence. 
  • It comes back to knowing the sponsor and spending enough time with management on the phone or video call and expanding your breadth of contact — you can still validate integrity in an old school way through a virtual format. Background checks are also imperative. 
  • There are hurdles to overcome but they aren’t insurmountable. White Oak is still issuing term sheets; they have lots of capital and want to do deals. Some of the deals in our pipeline originated pre-COVID and others post-COVID. 

Lenders taking more conservative posture – 18:00

  • Lenders as a whole are taking a much more conservative posture when it comes to evaluating credit. Seeing some price adjustment as well. There was a knee-jerk reaction off the block where people were taking 1.5-2 turns of leverage off the top-line number — that pendulum swung too quickly to one side of the spectrum at first but is starting to normalize again to pre-COVID leverage. 
  • When it comes to debt shops moving a deal forward with existing customers, it requires a complete re-underwriting of the opportunity given the changes in circumstances and extrinsic factors. 
  • Forbes M&A had a deal in the agricultural space that was pretty far down the road on the capital formation side of our practice. It was a traditional bank lender that was going to be a new client. They started the process pre-COVID and they came back to us last week and said that while they would normally do the deal, in today’s circumstances they couldn’t because they didn’t know the company and they saw balance sheet risk. Set up a time to follow up in early August. This was for a company in contracted agricultural products which was not going to see a hit in revenue or EBITDA. 

For existing deals in the pipeline that are sponsor deals, are debt providers going back to the sponsor for additional equity contributions to get deals done? – 23:35 

  • Depends on the original credit profile and balance sheet for the capitalization. If the scenario warrants it and what you thought was a 3.5-4 turn senior debt transaction feels a lot better at 3 turns, you’ll absolutely go back and ask the sponsor.
  • This is a whole new world and everyone wants to capitalize a company appropriately. It is a zero sum game. There is a heightened risk for everyone in these transactions and so getting communicating with everyone about risk tolerance and pricing expectations is perfectly appropriate. 

Private equity firms focused on maximum flexibility – 25:27 

  • Validor Capital has submitted two LOIs — one was a new platform, one was an add-on. Focusing from a lending perspective on existing relationships, since they’re looking for maximum flexibility — most likely to get that from a lender who knows you and who you’ve returned money to.
  • Next year is very hard to predict for industrial and manufacturing businesses. May not be until 2022 that we can be back or better than last year’s level, so they are focused on getting through to that point. 

Dynamic between buyers and sellers re: difference in valuation conversations prior to and after coronavirus: 27:37 

  • After the coronavirus crisis hit, Validor Capital made changes to a deal structure that was already in progress that included lowering purchase price, putting in some earnouts, and increasing the rollover. Waiting for feedback and expecting to get a dialogue going.
  • When it comes to the earnout, typically both the investor and seller want it in a short period of time, because of all the things that can change, but here 2020 won’t work. They designed the earnout so that half can be earned in 2021 and half in 2022, and even if the seller doesn’t hit the goal in 2021 but does in 2022 he can earn all of it. 
  • Altus Capital is seeing a lot of sellers pulling back on processes, especially those whose businesses have been impacted. 
  • Seller notes can be an option when there is a gap in terms of debt availability 

New standards for environmental health and safety due diligence post-COVID – 36:21 

  • SRP Environmental being brought in to verify that manufacturing facilities are providing training and doing deep industrial cleaning for COVID. This has held up deals. 
  • This work has replaced a lot of work they historically did in the oil and gas space. 
  • This work will be a fundamental addition to due diligence for buyers of manufacturing facilities; also doing the work for office buildings, stadiums, and other facilities as everyone looks to open the economy. All the work has to be done on site. 

How are sellers dealing with repricing and retrading of deals in progress? – 44:20 

  • Osage Advisors has two deals moving forward right now. One was through the documentation stage and just waiting for the sign-off from a major customer to complete the transaction. Concern now is more with the viability of the PE-backed buyer — want to see their updated financials and where we stand. It’s a stock and cash deal so the stock piece of the transaction may need to be repriced to the client’s benefit. 
  • The other deal is an European company looking to divest a U.S. division. Buyers still want a deal and the seller is very motivated, so there’s flexibility there. Anticipating an LOI this week and anticipating a significant portion based on performance, including a note. 
  • Sellers may be willing to take a seller note but they want to collateralize it — how can they be sure they will get paid? 
  • Forbes M&A made a concerted effort to manage both seller and buyer expectations at the beginning of this crisis. Started to slow roll deals where they were working actively with PE groups to keep them moving and continue to be top of mind when more deals hit the market in the next couple of months. 
  • Had an auction last month for a tech-enabled services company and some buyers asked for longer exclusivity periods for diligence — we afforded that flexibility so that we could keep things moving forward for both sides. 
  • In looking to avoid the retrade piece with the sellers, Evolve Capital is exploring having wealthy families in the industry provide industry financing. Plan to structure the investment as a mezz or junior subdebt piece and be able to keep the cash piece the same. 
  • Clearly the landscape has changed in terms of what is an attractive business to go after right now. For Evolve Capital, there are some industries that they’ll no longer go after for the foreseeable future. Also looking at deals that they might have passed on — are there processes that can be picked back up? Exploring pricing on a run rate, though that takes a little while to get comfortable with

Sellers are showing flexibility and understanding of the circumstances – 55:45 

  • Difference between this cycle and other major events that have impacted the M&A market in the last ~40 years is that sellers are adjusting much more quickly. 
  • Sellers and advisors understand the gravity of the situation and the long, tough economic road; they are being incredibly reasonable around understanding need for extended diligence or to reconsider valuation. 
  • Sellers want a partner — not just about capital. Even if it’s at a discount they are still interested in moving forward. 
  • There’s a lot of capital to be deployed. There’s the option to close with all equity and wait for debt markets to adjust and recap in the short term downstream. Also the possibility of initiating the partnership on a minority basis 

Need for lengthened diligence period – 1:03:05

  • Prior to the crisis, it was a struggle to get a 60 day exclusivity period. Now 90 days plus has been accepted without any comments or discussions. 
  • The challenge of getting people out into the field is driving the need for longer diligence times. Can do a lot of work remotely but need people in the field for QoE work and other purposes. Thinking around 90 days it’s that it’s going to be at least 30 days until there is more comfort around traveling. 

How much diligence can be done virtually? Will you close a deal without meeting in person? 1:06:21

  • In person is critical — won’t submit any bid without meeting the management team several times.
  • Will diligence but not close without multiple in-person meetings. The assumption when submitting LOIs is that there will be multiple visits in person in June or July. Sitting across the table is a key part of relationship building and making sure everyone is aligned. 
  • Sellers are offering virtual tours of plants in order to try to get deals done
  • Most are assuming that it will be weeks before travel opens up, and counting on that to be able to get deals done 
  • It’s all about relationships right now — going back to people you know who you’ve worked with before rather than entertaining new vendors. 

Past Roundtables

Find recaps and video/audio from past roundtables here. 

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