Florida Marketing Organization (FMO), an Orlando based insurance agency providing healthcare solutions throughout Florida, recently announced it has formed a partnership with Baldwin Risk Partners (BRP), a Tampa based insurance distribution holding company. PCE Investment Bankers served as financial advisor to FMO.
One may anticipate a spike in corporate divestitures immediately following a period of significant economic decline as companies pull back the reigns and focus on reducing non-core / under-performing units. Similarly, one may also expect activity to decline in the years following as businesses right-size the ship and transition into a more stable market. Oddly enough, these expectations were contradicted in the years surrounding the 2008 financial crisis. Divestiture activity for the five year period prior to the crisis depicted consistent expansion with annual growth of ~ 3%, but revealed a change once the crisis set in. Activity constricted by ~ 2% between 2008 and 2009 while companies accessed what to do next, but then started on an upward trajectory with growth of nearly 7% per year thereafter through first half of 2014. In the five year period (06/09 to 06/14), divestitures increased by nearly 40% from 2,500 per year to 3,500.
While it may seem at face value (pun intended) that the value of a note is equal to the outstanding principal balance; this is often not the case. The fair market value of a note is dependent on several factors, two of the most important being “counter-party risk,” which means the creditworthiness of the debtor, and cost of capital at the date of analysis. Understanding the creditworthiness of the debtor is the more complicated of the two, and potentially involves analyzing the debtor’s financial condition, and could involve a fairly complex analysis of an operating company, including an analysis of quality of assets and cash flows, the determination of a corporate credit score (Z-score), and other such analyses that are typical for underwriting debt. As an ancillary consideration, the lender should require access to relevant records so as to be able to perform such analyses if necessary.
In spring 2010 I addressed the difficulty of obtaining credit. A friend had asked about the current environment so I am sharing my thoughts with all of you. Hard to believe that so much time has passed so quickly since I last wrote about credit. Before you know it, the year will be 2020, and we will have emerged from these economic shackles of debt and unemployment. But back to the issue at hand – credit availability in the current economic climate.
Part of the answer is the banking issue of “Too large to fail” changing to “Too many to fail.” Community banks are still struggling with the effects of the Great Recession. The large loan charge-offs and substantial additions to loan reserves are depleting their capital reserves. In most areas, community banks represent approximately 50% of bank deposits and loans. Therefore, their health has a direct impact on the ability of local businesses to obtain business credit.
Nearly every industry feels stressed from current economic conditions but none has suffered more than construction. The federal stimulus plan was expected to offset declines in new construction but the projects funded have been slow to come to fruition. As a result, construction and construction related companies that enjoyed an extended period of significant capital expenditures now struggle with high debt payments while revenues, profits and cash flow continue to decrease. Compared to 2008, bankruptcy filings for construction companies increased by over 100%.
The dramatic decline in M&A activity over the past 12 months has seen an equally precipitous drop in Private Equity’s (PE’s) share in the M&A market. As the chart below highlights, M&A transaction volume peaked in 2007 with over 12,000 transactions and $1.7 trillion in value.
The recent economic downturn has been financially challenging for many businesses. Existing credit lines have been reduced, new loans from commercial lenders are more difficult to obtain, and accessing the public capital markets is likely not an option. So in this difficult market climate, where does a middle-market company turn for financing? The answer may be mezzanine capital.
The current recession in the U.S. has created a range of opportunities and difficulties for most mid-market companies. While some have tightened their belts as taught as possible to weather the downturn others are using stronger positions to their advantage to take market share or complete acquisitions. In both of these cases the highly coveted and valued resource today called “capital” is needed to successfully execute either strategy.
While the current economic environment and financial market meltdown have most business owners focused on conserving cash, controlling/reducing headcount and holding on for dear life, most of the wealthiest individuals in the world (including Mr. Buffett) will likely tell you that it is in these uncertain times that fortunes are made. Our belief is that this is true for distribution and industrial businesses that have the capital and courage to pursue strategic acquisitions in 2009. Valuations have meaningfully decreased and most of the attractive factors of the distribution marketplace remain – it is a large, diversified and growing market with considerable consolidation potential. A similar situation presented itself after the 2001/2002 slowdown and many distributors benefited handsomely from well-timed, highly strategic acquisitions.