U.S. shutdown begins to ping buyout world

  • Glitch hits deals involving SBICs
  • Antitrust reviews not going ahead
  • Effects seen as broad, uneven

More impacts are likely if the shutdown drags on. For instance, the Federal Trade Commission, which conducts merger reviews under the Hart-Scott-Rodino Antitrust Improvements Act, is closed, although the agency’s (much truncated) homepage says, “The FTC Premerger Notification Office will be open to accept HSR filings.”

Government contractors, like federal employees, are likely to find themselves on furlough if the agencies that they work for are closed, and portfolio companies also are likely to encounter delays on any federal permits that they may require.

But the impact of the shutdown is uneven across the government. Mail delivery, for instance, is unimpeded. As the U.S. Postal Service announced on Twitter, “When you see postal carriers deliver mail today, it’s a reminder that we are open because we receive no tax dollars for operations.”

Other agencies that have alternate sources of funding also may be able to keep their doors open, including the Securities and Exchange Commission, which is reported to be accessing fee revenue to remain at least partially open. But much of the federal government largely closed on Oct. 1, when a new federal fiscal year began without a budget or a continuing resolution authorizing ongoing spending.

The nominal cause of the shutdown was conservative insistence on delays or changes to the Affordable Care Act, the health reform law known as ObamaCare. One buyout executive, agreeing with conservatives that the law’s approach was flawed, still took issue with the tactics of its opponents. “If we bought a company and 10 days after we bought it, we decided we had a strategy that was in some way flawed, we wouldn’t just be able to shut that company down,” the executive complained, asking not to be identified because of the sensitivity of the issue.

Some deals have already been disrupted, if briefly, due to the involvement of small business investment companies, said Brett Palmer, the president of Small Business Investors Alliance, a group that represents the SBIC industry among other companies. SBICs themselves do not receive government money; they are private pools of capital raised through conventional fundraising, but they can lever their capital two times through the SBIC Funding Corp., an arm of the SBA.

In the first couple of days of the shutdown, some SBICs encountered glitches during deal closings, Palmer said, when the banks sent routine confirmation emails to the SBA to verify that the SBICs were eligible to draw leveraged capital. But the banks received standard-form out-of-office auto-reply messages saying that the SBA was largely closed, causing the bankers to hesitate to release the funds. In reality, SBIC credit facilities are maintained through the Federal Home Loan Bank system, a quasi-governmental network of regional lending cooperatives that have remained open since the shutdown, and the Bank of New York Mellon. It took a couple of days to untangle the confusion, Palmer said. “That’s straightened out now.”

However, for companies that have SBIC applications in the SBA pipeline, the approval process is frozen, Palmer added. While the backlog could be minimal if the government reopens soon, the delays could stretch out as the shutdown continues.

The current shutdown is the 18th such event since 1977 and the first since the epic 21-day shutdown of December 1995 and January 1996, according to the Miller College of Business at Ball State University. The average shutdown during that period was 7.2 days, but the median was only four.

Considering the vast scale of government, impacts on portfolio companies are inevitable, said Gary A. LaBranche, president and CEO of the Association for Corporate Growth, which represents mid-market companies.

“The reality is that government touches the lives of so many people and affects the operations of so many companies, whether it’s a license, a safety inspection or some other kind of approval, the government affects thousands of businesses. Some of those will be portfolio companies,” LaBranche said.

Even though the enforcement mechanism of the government is largely on hold during the shutdown, that does not relieve companies from their reporting obligations under the law, said Palmer of the SBIA. “You’re still responsible to make the filings, even if there’s no one over there to receive them.”

While the shutdown is inconvenient, and likely will affect more companies if it drag out, LaBranche said, “the bigger concern is around the debt ceiling issue, concern about a possible default by the government and the impact that would have on interest rates and the economy.”

That issue is likely to come to a head by mid-October when the government reaches the limit of its ability to borrow. House Speaker John Boehner reportedly said Thursday he would not risk the credit of the United States and would turn to Democrats for support to pass a debt limit increase.