And Such Small Portions (Last of a Series)

In case our readers missed the reference of our series title, the joke goes like this: Mel and Harry are lunching at a diner. ”The food here stinks,” Mel complains. “Overcooked, expensive, and no taste.” “Yeah,” Harry says. “And such small portions!”

We’ve invoke this old chestnut as a metaphor for the state of middle market loans. On the one hand, as we’ve covered in detail, structures around ebitda adjustments and debt limitations have deteriorated. Pricing, while still at a reasonable premium to broadly syndicated loans, remains a challenge given the higher leverage multiples being demanded.

But loan buyers have raised a significant amount of capital dedicated to direct lending over the past two years. They have a lot of dry powder to put to work – as do their private equity clients – and it’s burning a hole in their numerous pockets. LPs are a pretty demanding bunch. After all, cash doesn’t earn much these days.

To make matters worse, in the syndicated middle market arrangers often go out to as many institutional investors as possible. The goal is to reduce underwriting risk to zero, and keep as large a stable of prospective buyers on the alert for future issuance.