Economic turmoil affecting lending

We are a Commercial Loan Brokerage shop and work with over 500+ funding partners. Because of that we hear a lot about what is going on in the industry. There are way too many things happening to cover in one quick post here. But here are a few items to note:

1) Many lenders are struggling with a liquidity problem right now. Due to both deposits moving out of the industry as well as bond prices dropping and some banks having liquidity tied up in bonds they do not want to liquidate, the lack of liquidity has caused some institutions to pause lending and others to limit new lending to only existing customers or top tier deals.

2) Due to rising interest rates lenders are stressing all variable rate loans typically 1.5% to 3% higher than today's rates. That makes it harder for deals to qualify and can reduce the amount of debt the lender is willing to lend.

3) Some lenders have increased the DSCR ratios they want to have it in response to concerns over market conditions.

4) A number of lenders have pulled back on some higher risk industries such as hospitality, retail, trucking, etc. that tend to be more impacted by tightening economic conditions.

5) In general most lenders have tightened their underwriting criteria at least a little bit based on concerns of a pending recession.

6) A number of non-bank lenders are completely frozen or have even been forced to shutdown due to having their funding pulled from their banks or institutional investors due to market concerns and a week secondary market for commercial mortgage backed securities due to rising interest rates and downward pressure on bond prices.

With all of that said, there are still plenty of deals getting done. The impacts are across the board and we have even seen some SBA lenders pull back as well, but overall there are still lenders willing to make deals. The key is putting together a deal that makes sense, being sure you have fall-back liquidity and excess cash flow to cover changes in interest rates, and you are buying a business that is stable and not likely to decline. Buying businesses on one-year performance or buying businesses with inconsistent performance or tight DSCR is going to be much more of a challenge today then it was a year ago. I am always willing to have a discussion on a potential deal. You can reach me here or directly at --@----.com

Higher interest rates should certainly drive lower valuations. The past 10+ years were an era of free money and that flowed through to higher valuations, especially in PE - it’s easy to make the numbers work when leverage has minimal cost. I’m not going to make predictions about where rates should / could go, but ultimately I think this is valuation-driven, not rate-driven. If we enter a stagflationary period of recession + inflation, you could see lower EBITDA and higher interest, which will obviously impact your DSCR. When looking at the valuation and the cap structure of your deal(s), I would keep that in mind - paying a higher price and/or taking more leverage will reduce your cushion, which might cause some nerves in an uncertain time.