Navigating today's debt capital markets.

• Author: McCarrick, Bob
• Position: TREASURY

The U.S. economic recovery is firmly underway and the growth prospects for many mid-size companies are better today than they've been for half a decade or more. The Federal Open Market Committee (FMOC) expects steady growth in the 3 percent range through the end of 2014, and it has also pledged to keep its ultra-low benchmark interest rate until 2015.

As traditional middle-market lenders are being joined by institutional investors with deep pockets and a strong desire to participate in these loans, ample liquidity exists for midsize companies--those with anywhere from $10 million to $1 billion in revenue. What's more, new products are available that afford more flexibility among lenders. The end result is a combination of steady growth and affordable capital, in short, a near ideal environment for mid-size company borrowers.

As businesses begin to navigate the increasingly intricate debt capital markets, it's crucial for lenders to anticipate the complexities of the financing landscape. There are new senior debt options available that can be structured as either asset-based loans (ABL) or cash-flow-based loans, and junior debt offerings in the form of second-liens and mezzanine funding remain widely available in the private market.

Meanwhile, the biggest mid-size firms could bypass these private offerings altogether and tap the public debt markets instead, where they can lock in low rates for longer periods. As CEOs and chief financial officers (CFOs) of midsized businesses look to take advantage of the current environment to ramp up borrowing, lenders should keep a few developments in mind when providing strategic industry counsel to customers and partners.

Liquidity from Institutional Investors

In the past, lending to mid-size companies was dominated by banks and finance companies. But now large institutions, such as pension funds, hedge funds and bank-run mutual funds, are getting involved and account for 60-70 percent of senior lending at the higher revenue end of the middle market. While these institutions lend directly to the company, they typically don't have a direct relationship; instead they participate in syndicates arranged by an agent such as a bank or finance company.

A big reason for this increase in lending is institutional investors' desire to diversify their holdings from fixed-rate debt to include more floating-rate debt, which offers some protection should interest rates start to rise. Plus, the yield is relatively good.

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