It seemed like easy terms for M&A financing would last forever, didn’t it? But this Wachtell memo points out that the credit markets have recently tightened considerably, and that companies seeking financing for their deals are facing more challenging conditions. The memo offers tips on navigating the current environment – including this one on the importance of keeping potential lenders’ differing risk tolerances in mind when seeking financing:
When markets are volatile, different financing sources may have markedly different views of the risk that any particular financing transaction presents—and as a result, may offer vastly different terms. Of course it is always the case that different financial institutions(and particularly different types of financial institutions—money-center commercial banks, investment banks or alternative lenders) have different risk tolerances, but recent volatility and unpredictability in the financing markets have resulted in greater differentiation in the terms that individual financing sources are willing to offer potential borrowers.
Therefore, borrowers seeking to finance a transaction should test (and should ensure that engagement letters with their investment bankers provide them with sufficient flexibility to test) the market with multiple financial institutions of varied types to ensure that they are partnering with the lender(s) best suited to their transaction given the specific market conditions. Disclosing an M&A transaction to more potential financing providers prior to signing may expose a deal to greater leak risk, but a borrower can mitigate this risk and achieve substantial and offsetting benefits by properly managing and calibrating this process.
Other topics include strategies for dealing with rapidly changing deal terms from proposed lenders, managing the broader “flex terms” that lenders are likely to seek in financing commitments, and managing the impact of risks associated with the political environment.
– John Jenkins