72% of transactions conducted in the institutional debt market during Q1’ 24 have been for refinancing and repricing. This is the highest level of refinancing volume experienced in this market in over a decade. 

While the institutional debt market is relevant for larger middle market firms with transactions typically greater than $150MM, can this be a leading indicator of what is to come in the lower middle market? 

We think so.

The economic environment is less uncertain and a lot of lenders have not put much capital to work in the last 18 months. As a result, they are motivated to protect their existing loan portfolio and also book more loans by agreeing to accept a lower interest rate and/or more borrower friendly terms.

From what we see in the middle market everyday, we believe that the refinancing cycle has started in the conventional middle market segment as well. 

This research note is designed to inform our readers about the current market conditions and how to position themselves to take advantage of the current window of refinancing opportunities to lower their interest burden.

Key Insights

Why refinance now?
When you should consider refinancing?
What to expect in the current debt markets?
What challenges to expect while refinancing?
How to prepare before approaching lenders?
How can CAPX help?

Why refinance now?

Refinance now because it’s possible to get debt at lower rates again. 

In fact, interest rate margins have declined to early 2022 levels or below.

Most lenders are hungry for deals due to the slowdown in M&A activity. So, you may have a choice of lenders. And, even if you cannot find a bank to refinance your debt, there are hundreds of credit funds ready to deploy capital.

When should you consider refinancing?

Consider refinancing if you have:

1. Expensive Debt – your current debt costs 10% or more.
2. Upcoming maturity – your debt matures within 18 months.
3. Constrained liquidity – your current lender cannot your liquidity needs.
4. Tight covenants – your existing loan covenant structure is too restrictive and inflexible.

Can you get better terms, higher liquidity and lower interest rates for your company?

We can help you think through your options. Click here.

What to expect in the current debt markets?

Although it is still unclear when or how much rates will go down, here are three things you can definitely expect to see when refinancing in the current debt markets.

First, it’s a bifurcated market. If you have a highly creditworthy deal, many lenders are available and will compete for it. But if your deal has unique attributes, there will be fewer lending options and it will require broader access.

Second, it’s a slow lending market. Right now, lenders are selective and slower to respond. So, it takes much longer to get a deal done now compared to 18 months ago.

Third, banks still have the cheapest capital, but increasingly, they are not the only game in town. It might make sense to pursue banks for lower rates if you have meaningful cash on the balance sheet and steller credit quality. Alternatively, for a few percent more in rates, you can get a choice of non-bank lenders willing to offer more liquidity and more capital with more accommodative covenant structures.

What refi challenges can you expect?

Companies often turn to CAPX after facing the following three challenges:

1. Wrong Deal Structure – capital can be obtained under multiple structures. Lack of full understanding of available options and lenders that can accept a certain structure always leads to wasted efforts, expensive capital and ultimately, frustration.
2. Limited Network – everyone knows some lenders, but do you know the right lenders? Heavy reliance on only existing relationships often provide a false sense of security and almost always lead to less than optimal capital solution.
3. Loss of Time – Pursuing less than optimal structure with wrong lenders wastes a lot of time – often months. At some point, borrowers end up accepting less than optimal solutions because that’s the only option they have and they are running out of time.

What type of debt structures and lenders are right for you?

Get a market read from our CEO, Rocky Gor. Click here.

How to prepare before approaching lenders?

First, determine your specific needs and based on that identify lenders you should approach. When you approach lenders, identify specific goals of your refinancing process.

Second, prepare your basic financials. Gather audited or reviewed financials for the last three years, most recent TTM financials and financial projections for the next three years.

Third, prepare your pitch. In this narrative, explain why a lender should give you capital and why your business will be able to repay them. You will need a cohesive and compelling pitch that you can make to all lenders you approach to avoid individual repetition.

Have you thought through your pitch for lenders?

We can help you prepare for an efficient outcome. Click here.

How can CAPX help?

CAPX is a secure, web-based corporate finance marketplace that matches middle market companies seeking more than $5MM with relevant lenders nationwide, and uses advanced algorithms to streamline workflows and accelerate deal execution.

With CAPX, middle market borrowers can:

• Review and compare multiple credible structures to obtain the capital you need without having to consult an expert
• Access debt capacity under any capital structure scenario and identify the number of lenders available to provide capital, irrespective of credit quality
• Find matching lenders – both banks and alternative lenders – from across the country without networking or meetings
• Use our online tools to craft a compelling, lender-ready credit pitch once and instantly distribute to multiple lenders of your choice
• Obtain competitive rates and terms in days without repetitive calls and meetings

CAPX is designed to be a self-serve platform with no direct cost to borrowers, since  CAPX is compensated by lenders when deals close.

Optional CAPX Assist services are available for a fee to help borrowers structure and launch deals, obtain term sheets, as well as negotiate and close deals with lenders, if desired.