Mergers & Acquisitions

Debt Capital Market Update – Q3 2023

  • Leverage multiples have pulled back significantly in M&A transactions from their 2021 peaks due to a tightening of the lending environment, Sr. Debt / EBITDA, decreased from 4.0x in 2021 to 3.5x in Q2 of 2023 (as shown in the below graph).
  • As a result, transactions have required an increase in equity contributions in response to both the rising cost and difficulty of obtaining debt, signaling that lenders have increased their borrowing criteria. Debt remains most available in the lower middle market sector.

Total Debt/EBITDA Multiples 


Source: GF Data 

Debt and Equity Contribution by Year

Debt and Equity Contribution by Year

Source: GF Data 

Senior Debt Pricing — Splits by Period 

Senior Debt Pricing -- Splits by Period

Source: GF Data

All-in Sub-Debt Pricing YTD 

All-in Sub-Debt Pricing YTD

Source: GF Data 

  • The rise in the cost of debt for middle market companies has hampered all types of strategic growth initiatives, and for both strategic and financial buyers (as shown in the above left graph), this means less ability to fund growth through acquisitions.
  • The debt markets are a key underlying driver of M&A valuations. Valuations will decrease when leverage multiples fall and the cost of debt increases.
  • With the decrease in debt availability, earnouts and seller-notes are becoming a larger part of the structure of a transaction, lowering the total cash available at closing.
  • Selling to strategic buyer, who can use cash from their strong balance sheet, or an existing credit facility may take some funding risk out of a deal for a nervous seller.
  • The most recent yield curve has continued to stay inverted, as of September 25, 2023, there has been a roughly 54-basis point negative spread between the 2-year and 10-year treasury, signaling a possible economic downturn.
  • The FOMC decided at their most recent meeting not to raise rates (holding the target rate at 5.25-5.5) but signaled that one more rate hike could occur, pointing to a strong and sound banking system, slowing job gains, and tighter credit markets weighing on businesses and households.
  • Despite the annual CPI increasing from 3.2% in July to 3.7% in August, there was a significant downtick in comparison to August of 2022 when CPI sat at 8.3%. This may have warranted the FED’s decision to take a touch and feel approach to rate hikes moving forward.
  • I would recommend keeping your credit facilities on a floating rate basis. That may mean keeping the term or maturity shorter or pay for an option to convert the floating rate to a fixed rate. Credit facilities may come with a prepayment penalty, defeasance fee, or make-whole provision; review those carefully before signing on the dotted line.

Annual CPI

Source: U.S. Bureau of Labor Statistics 

Daily Treasury Yield Curve Rates 

Daily Treasury Yield Curve Rates
Source: U.S. Department of the Treasury 

10-Year Treasury Rate

10-Year Treasury Rate

TKO Miller Spotlight Transaction 

  • Borrower: gThankYou, LLC, a service business located in Fitchburg, WIgThankYou!
  • Lender: Greenwoods State Bank, headquartered in Lake Mills, WI
  • Purpose: Acquisition financing and funding future growth of the Company
  • Facilities: Term loan and revolving credit facility
  • Collateral: General business security agreement
  • Recourse: None
  • Other Considerations: Pure cashflow loan, covenant-light structure, subordinated seller note
  • Leverage Multiples:
    • Senior debt/EBITDA:  2.5x
    • Total Funded Debt/EBITDA: 3.0x

TKO Miller, LLC is an independent, advisory-focused, middle market investment bank. With over 130 years of collective transaction experience, TKO Miller provides merger and acquisition and financial advisory services for privately-held and private-equity owned businesses, with a special focus on family-and-founder-held businesses.

TKO Miller aims to bring value to clients by combining outstanding people with a results-oriented, flexible approach to transactions. Our services include company sales, recapitalizations, asset divestitures, and management buyouts. TKO Miller has a generalist focus and has served clients in a wide range of industries, including manufacturing, business services, consumer products, and industrial products and services. For more information, visit our website www.tkomiller.com 

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