How has the aerospace and defense lending environment changed since the Great Recession?
A: The financing market has improved markedly over the past two years. In 2009, few deals were getting financed and those thatwere had terms that were quite onerous. Over the past 12 months we’ve witnessed a significant recovery in the market, with more lenders actively seeking business resulting in higher leverage, lower pricing and structural terms increasingly favorable to borrowers. However, with the exception of a few deals in the government sector, leverage multiples have remained under control.
What hasn’t changed is lenders’ desire to work with higher quality companies. Borrowers with limited future revenue visibility or operating in sub-segments with unclear direction are still finding it challenging to secure financing on attractive terms.
How would you describe the current financing environment?
A: Middle market borrowers looking for financing to support their growth initiatives, acquisitions and dividend recapitalizations are able to find leveraged cash flow lending with attractive terms. However, the structure and pricing of available financing can vary greatly depending on the size and quality of the borrower. The pool of potential lenders is greater for borrowers with EBITDA exceeding $10 million; potential leverage and deal terms are more attractive for companies above that threshold, with another noticeable improvement for companies with EBITDA greater than $25 million.
The lending market is easily spooked by worldwide events, but we find that aerospace and defense companies can leverage their contract backlogs and more predictable revenue and cash flow to continue to access the market during volatile times.
What makes a borrower attractive?
A: First and foremost, lenders are looking for companies that can at least sustain their current level of earnings using a conservative set of forecast assumptions, with a high degree of visibility on the drivers of those earnings. Even in the face of expected top-line budget pressures, defense / government services remains an attractive sector to lenders, due to a typically high proportion of revenues tied to contracts, contractual backlog often extending out several years, decent visibility on future orders, sticky customer relationships and high switching costs.
A strong management team is also key to making a company an attractive borrower as effectively managing a business through a tough economic time is of vital importance to lenders.
What should a company consider before it seeks financing?
A: Companies can best position themselves by having robust financial reporting and forecasting well in advance of a major transaction, e.g., a large acquisition or recapitalization. Lenders are looking for companies that can provide detailed, granular forecasts and business segment / product line reporting, and are able to demonstrate robust financial controls.
In addition, middle market companies often have not obtained audited financial statements from a respected accounting firm; these are generally required in leveraged cash flow deals and represent another preparatory step likely worth taking. Once a deal opportunity is identified, including lenders early in the process with a full and open sharing of information greatly improves the likelihood of a successful execution.
Hand-in-hand with financial reporting is the need for companies to clearly and concisely articulate their business plan, the products and services offered, and the markets and customers they serve. A coherent explanation of the company and its operating environment can go a long way in building understanding on the lenders’ part, leading to more appropriate structuring and pricing.
How have budget negotiations in Congress impacted your client base?
A: With incomprehensible budget deficits and a polarized Congress, it is not difficult to see why there is a tremendous amount of pressure on the government to slash large budgets and make the Department of Defense (DoD) and its related agencies more efficient. While we do expect the DoD to take a hard look at some of the more expensive and high-profile procurement programs, and the current focus on contracting efficiency will continue, we are optimistic that the DoD budget will provide opportunities for our Aerospace & Defense clients.
"Lenders are looking for companies that can provide detailed, granular forecasts and business segment / product line reporting, and are able to demonstrate robust financial controls.”
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Members of the press who have an interest in speaking with Mr. Cantwell can contact Curt Ritter at curt.ritter@cit.com