2023 M&A Annual Review 11 14 See our July 28, 2023 client alert, SEC Adopts Cybersecurity Disclosure Rules for Public Companies. “The year saw continued growth, though, in ‘private credit’ acquisition loans by non-banks, such as asset managers, hedge funds, and private equity funds, which usually make loans directly to borrowers without an investment bank, broker, or other intermediary.” 5 2023 was a tough year for buyers seeking acquisition financing, with interest rates rising and banks less willing to fund aggressively. The dislocation in the bank market starting in early 2023 caused by macroeconomic concerns, bank failures, and rising interest rates helped to dampen the interest of banks in making larger loans. Growth in Private Credit The year saw continued growth, though, in “private credit” acquisition loans by non-banks, such as asset managers, hedge funds, and private equity funds, which usually make loans directly to borrowers without an investment bank, broker, or other intermediary. Such lenders have dominated the recent market for acquisition loans to private equityowned middle-market companies. The past year saw them also make loans for larger deals, which historically had been arranged and led by investment banks, with loans broadly syndicated. Extending the benefits of private credit acquisition loans—easier negotiation of financing related M&A deal terms, increased certainty of financing, speedier closing, and limited loan marketing periods, among others—to larger M&A deals gives buyers more financing options and possibly better terms. There are some disadvantages, though, particularly in the middle market, such as more complex pricing, often a maintenance financial covenant, and higher call protection. Borrowers Increase Negotiating Leverage The dislocation in the first half of the year caused borrowers to accept pricing and deal terms that lenders, particularly banks, were willing to give. This was a turnaround from the trend of prior years. Yet with 2023 Q3’s easing of broader economic concerns and related deal volume growth, terms became more favorable to borrowers. Further, private credit lenders’ move into funding larger M&A deals created a competitive dynamic with investment banks. Impact of Acquisitions on ESG Loans In 2023, market participants and bank regulators encouraged lenders and borrowers to review whether ESG standards specified in loans that offered benefits to borrowers—such as lower debt service costs—were realistic, and whether testing was done with appropriate rigor. ESG lending volume dipped as such standards were reviewed. Still, an acquisition may affect the ability of either the buyer or the target to satisfy any such ESG standards included in their own financings. Additionally, if ESG standards are included in financing for the acquisition, the buyer (and often the lender) will need to be able to conduct relevant due diligence of the target to ensure the standards can be met at closing. Some financing contracts allow the addition of ESG provisions following the closing if the standards cannot be met or adequately diligenced before the closing. Private Credit Expands During a Tough Lending Environment
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