Wells Fargo’s cash flow lending activities appear to be moving up market. It’s a prospect that could leave buyout shops that specialize in the lower end of the middle market with one less lending option at a time when they need them the most.
According to two sources familiar with the matter, the San Francisco-headquartered bank, whose history stretches back to the Gold Rush in the mid-1800s, is steering clear of providing cash flow loans to companies with EBITDA less than $10 million. A spokeperson for Wells Fargo wasn’t able to respond by press time.
“Wells [Fargo] used to be happy to do cash flow deals with us for companies down to $5 million EBITDA,” said one of the sources, based on the East Coast. “Now they’re telling us that they are simply not looking at cash flow loans for businesses with under $10 million [in EBITDA].”
Another source, based in the Mid-West, said the bank’s new minimum strike range could be considerably higher, possibly in the $20 million EBITDA range.
The sponsored and leveraged finance section of the Wells Fargo’s Web site does not list EBITDA requirements, noting only that its cash flow transaction sizes “generally start at $10 million or higher.”
Sources said they aren’t surprised Wells Fargo would raise the minimum EBITDA threshold for its cash flow products, which is a trend they contend is nearly ubiquitous in today’s economic climate.
Smaller companies are generally stereotyped as the first wave of businesses to succumb during poor economic times because of unattractive characteristics like thin management teams and high customer concentrations that make them vulnerable if they lose a customer or two. Then there’s the fact that, on a dollar-for-dollar basis, once a smaller company hits a troubled patch, it has a shorter runway than its larger brethren before it gets down to zero.
“The entire market has been going up-market, away from the $5 million to $10 million deals,” said one mid-market lender based in New York. “Those are the toughest ones to get financed right now, no question about it.”
With the mega- and large-market deals already out of commission as a result of the credit freeze, a dearth of cash-flow lending at the smaller end of the middle market leaves an even narrower band of the buyout lending universe open to consummate transactions. Overall, the number of control-stake deals sponsored by U.S. buyout shops was down 15 percent in the second quarter when compared to the first three months of the year. The largest closed deal of the second quarter, consummated by the listed buyout and hedge fund manager
Aside from market risk, there’s also speculation that Wells Fargo’s up-market move could be related to a possible restructuring taking place in the bank’s leveraged lending department following its December 2008 acquisition of Charlotte, N.C.-based Wachovia Corp., which had a leveraged lending division of its own. Wells Fargo struck the deal to acquire Wachovia Corp. in October 2008, when the public markets were in freefall following the collapse of Lehman Brothers.