Article photo by Nicholas Rigg/Getty Images. 62 November 2010 practicallaw.com
Middle Market Lending Traits and Trends 2010 marks the return of more robust lending activity in certain segments of the middle market. Many aspects of this revived market have dramatically changed as a result of the financial crisis, although loan structures for middle market companies of higher credit quality are in some respects returning to pre-crisis terms. CASSANDRA G. MOTT PARTNER JONES DAY Cassandra represents capital providers and borrowers in a broad range of secured and unsecured commercial finance transactions across a vast array of industries, including energy, health care, insurance, consumer products, manufacturing and franchising. JOHN E. MAZEY PARTNER JONES DAY John represents financial institutions, private equity funds and public and private companies on a wide variety of commercial financing transactions, including leveraged cash flow and asset-based lending, leveraged buyouts and recapitalizations. SCOTT J. MOORE PARTNER JONES DAY Scott has broad experience representing agents, lenders, borrowers and other market participants in a wide variety of commercial financing transactions, including secured and unsecured financings, securitizations, multicurrency financings, acquisition and leveraged buyout financings, and workouts and restructurings. Lending in some sections of the middle market (see Box, What is the Middle Market?) is once again on the rise. Historically, loans and other extensions of credit to middle market companies have comprised a very large segment of the overall debt market. In the early 2000s, demand for leverage to fuel growth and acquisition in the middle market rose to unprecedented levels. This increased demand gave rise to new credit providers (in addition to banks, commercial finance companies and mezzanine lenders), such as CLOs and credit funds, as well as new structures, such as second lien loans and covenant-lite loans. The credit crunch caused lenders of all types and sizes to retrench and seek cover. These formerly reliable and critical sources of liquidity for middle market companies disappeared, making new credit almost completely unavailable to them. In addition, refinancings and maturity extensions provided opportunities for lenders to reprice risk and reduce or terminate existing lines of credit, further straining the middle market. Now, however, lending activity has become more robust in the large middle market. For the third quarter of 2010, large middle market financing was up 101% from the same period in 2009. Credit does, however, remain relatively tight in the traditional middle market. For the third quarter of 2010, traditional middle market financing was up only 28% from the same period in 2009 (see Middle Market 3Q10 Review and 4Q10 Preview, Thomson Reuters LPC, October 8, 2010). This is due to, among other things, the: Perception of increased risk in lending to smaller companies. Practical Law The Journal November 2010 63
WHAT IS...? WHAT IS THE MIDDLE MARKET? In the lending context, the middle market is typically defined by reference to either the size of the borrower or the size of the loan. The categories of borrowers and transactions included within the middle market vary greatly, however, and often depend on factors such as the size of the lender, geography, industry sector and cyclicality. Generally, the middle market consists of companies with less than $500 million in annual revenues and encompasses deals sized at less than $500 million. It can be further subdivided into, at a minimum, a: Large middle market (deal sizes of between $100 million and $500 million). Traditional middle market (deal sizes of $100 million or less). Unwillingness of larger banks to finance smaller companies. Inability of small community and regional banks to lend. Lack of access to financing alternatives, such as high-yield offerings typically available to larger companies. As expected, many aspects of the revived middle market have dramatically changed as a result of the financial crisis. Unexpected, however, is that loan structures for middle market companies of higher credit quality are in some respects returning to pre-financial crisis terms. This article examines the factors impacting the middle market landscape and highlights recent trends in middle market deal terms. MIDDLE MARKET LANDSCAPE The effects of the credit crisis on the middle market environment have been profound, leading to some unexpected consequences. The initial crisis and lack of liquidity led to bank and business failures, job losses, home foreclosures and pronounced economic slowdown. Banks in need of capital were provided federal assistance and guarantees and undertook capital raises and investments. The banking industry was greatly consolidated as strong banks acquired their weaker rivals, all the while stockpiling liquidity at the expense of making loans and exacerbating the lack of liquidity in the business sector. Fortunately, many banks, with their fortified balance sheets, are now willing and able to lend again. At the same time, however, the demand for capital by middle market businesses has decreased sharply as the economic slowdown has forced many companies to curtail discretionary capital investment and expansion or to cease operations altogether. As a result, instead of the absence of capital in the higher end of the middle market, there is now a surplus. Competition among lenders to finance the much smaller number of desirable deals has led to the easing of credit terms and structures, in some cases reminiscent of the pre-crisis market. At the same time, several forces have begun working to increase demand for liquidity and will presumably start the process of bringing the supply and demand for liquidity in the middle market towards equilibrium. Among these are the: Proposed dividends tax increase, which has prompted a spate of leveraged dividend financings by private equity sponsors to effect their return of principal and gains at the lower current rate of taxation. Proposed capital gains tax increase, which has also prompted an increase in private equity M&A activity this year. General economic stabilization in the US. Resurgence of M&A activity, which has been driving several acquisition financings and the reentry of private equity firms and their portfolio companies to the markets. Looming maturity bubble, which has motivated many borrowers to amend and extend the maturities of their existing credit facilities beyond 2011 2015 (the so-called wall of maturity of trillions of dollars of debt incurred by private equity funds and companies in connection with the leveraged buyout boom, which is scheduled to mature around the same time). Some of the other trends and developments in the middle market since the financial crisis have included: A shrunken pool of lenders. The growth of asset-based lending and factoring. Cash flow deals becoming limited to the large middle market. The growth of the high-yield market. SHRUNKEN POOL OF LENDERS The number of lenders active in middle market transactions has decreased since the financial crisis. Although this pool still includes some money center banks (more often in the large middle market), 64 November 2010 practicallaw.com
super-regional and regional banks, community banks and specialty finance companies, lenders such as CLOs and leveraged credit funds have virtually disappeared from the lending arena. Given that in 2007 CLOs and other leveraged credit funds accounted for more than 50% of the demand for syndicated loans, their departure has left a significant gap in the supply of liquidity. Big money center and super-regional banks have been and continue to be reluctant to engage in traditional middle market transactions and many of the regional and community banks that routinely serviced this market continue to struggle with exposure to commercial real estate loans in their portfolios and required capital levels, making them unable to lend. For would-be middle market borrowers (especially on the smaller side), this lack of a robust pool of healthy regional and community banks, finance companies, CLOs and other fund lenders continues to present challenges, and often times significant barriers, to obtaining credit. GROWTH OF ASSET-BASED LENDING The vast majority of middle market lending is done on a secured basis, commonly using either an asset-based loan (ABL) structure or a cash flow structure. An ABL in its simplest form is a loan sized as a percentage of and secured by certain assets of the borrower. In a remarkable reversal from the free fall of prices on secured middle market loans in the secondary market during the financial crisis, ABLs, as a class, have regained virtually all of their value and are now expected to produce significantly improved risk-adjusted returns both in the primary and secondary markets. In addition, data has shown that recoveries on defaulted senior secured loans since the fourth quarter of 2008 have been nearly 78%. In contrast, recoveries on defaulted senior unsecured bonds seldom exceed 50%. As a result, there has been substantial migration in the middle market from unsecured and cash flow loan structures to ABL structures. While ABLs have long been commonplace in the traditional middle market, many large middle market borrowers are now adopting this structure. Before the financial crisis, large middle market borrowers had an easier time securing cash flow loans than traditional middle market borrowers. But now, even the large middle market borrowers have seen a significant downturn in the availability of cash flow loans or cash flow loans at covenant and pricing levels that are sustainable or make sense for their businesses. Many of these borrowers have converted or refinanced existing cash flow deals to ABLs or have chosen to bifurcate their financings to accommodate both an ABL and a high-yield debt component. Lenders in the middle market have become increasingly focused on the value and type of the assets and their liquidity in determining whether, and how much, to lend. The ABL relies heavily on a borrowing base, which is essentially a loan-to-value ratio. The borrowing base is typically comprised of a single category or some combination of categories of assets, such as accounts receivable (A/R), inventory and equipment, meeting certain defined eligibility criteria. The borrowing base is determined by applying an advance rate (for example, 70% to 85% of eligible accounts and 50% to 70% of eligible inventory) to the value of the eligible assets to determine exactly how much a borrower can draw on a facility at any given time. Typically an ABL includes regular collateral reporting requirements (such as borrowing base certifications and A/R aging reports, inventory and other appraisals and frequent field examinations) in addition to the usual financial reporting associated with other lending structures. However, as a result of the secured loan-to-value protections, in many instances ABL structures require fewer and less onerous financial covenants (including, in some cases, covenant-lite or springing covenants) and more favorable risk-adjusted pricing than under an unsecured or cash flow structure. These relaxed financial covenants can be especially beneficial to companies that have seen their EBITDA shrink to levels that would make compliance with typical maintenance covenants difficult or impossible. >> For a Practice Note explaining the principal characteristics of asset-based lending transactions, search Asset-based Lending: Overview on our website. FACTORING Similar to the growth of the ABL market, there has also been a resurgence in factoring. Unlike a secured loan, where a lender takes a lien on the assets of a borrower to secure repayment of a loan, the factor actually purchases the A/R from the borrower. The sales are priced at a discount, which is usually at a rate higher than the comparable rate of interest on a loan because a factor typically assumes the risk of loss on the receivables it purchases and often has higher collateral administration costs than a traditional lender. In addition, factoring is often considered by some to be last-resort financing. Despite these issues, because traditional middle market companies have been excluded from the bank and high-yield markets, factoring has increasingly become a source of available financing. Practical Law The Journal November 2010 65
CASH FLOW DEALS IN THE LARGE MIDDLE MARKET A cash flow loan is a financing based on the expected cash flows of the borrower. Loans made to companies based on expected cash flows involve maximum loan thresholds or lending commitments that are not tied to a borrowing base or the value of collateral, if any, that might secure those loans. Cash flow lenders rely on their borrowers continuing to operate their businesses in a cash positive environment. In these structures borrowers must comply with various financial maintenance covenants (that is, financial covenants that must be met on an ongoing basis), such as minimum EBITDA, fixed charge coverage and leverage restrictions. However, companies looking to finance through the high-yield market face challenges that do not necessarily arise in private loan deals, such as: Complying with public disclosure requirements. Obtaining credit ratings. Dealing with substantial non-call periods or significant prepayment premiums. Engaging with a group of investors with whom negotiation of amendments and waivers can be difficult and costly to obtain. Also, the high-yield market often cools or shuts down unexpectedly adding to execution risk. These additional burdens may incentivize companies in the large In the current environment, the cash flow loan is predominately available only in the large middle market and in term loan or high-yield tranches of larger financings, ceding the majority of the rest of the middle market to ABL and other asset-based structures. Before the financial crisis, cash flow loans were not uncommon across the middle market, especially at the larger end. However, during the past few years many of these companies lost business and what had been a predictable stream of revenue, making covenant compliance more difficult and resulting in increasing defaults. In the current environment, the cash flow loan is predominately available only in the large middle market and in term loan or high-yield tranches of larger financings, ceding the majority of the rest of the middle market to ABL and other assetbased structures. HIGH-YIELD MARKET For large middle market companies, the high-yield bond market has helped to fill the void left by the contraction in the conventional bank financing market and the departure of CLOs and other leveraged credit funds from the syndicated term loan market. While the initial costs associated with a high-yield note issuance in a private placement or public offering can be high in comparison to the costs associated with negotiating and closing bank loans, the favorable overall yield payable in the high-yield market, longer tenor and flexible covenants have made this market attractive for eligible issuers. Further, the high-yield market has shown that it can execute quickly to keep pace with market demand. middle market to return to the conventional bank market as conditions become more favorable. >> For more information on high-yield debt, search Debt Securities: Overview on our website. TRENDS IN MIDDLE MARKET DEAL TERMS With the return of lending to certain sections of the middle market, there have been some noticeable trends, including the: Return of covenant-lite deals. Use of debt buybacks. Increase in leverage. Reduction of required equity contributions and the return of dividend recaps. Increase in the use of call premiums. Changes to lender yield provisions. Use of amend and extends. Reappearance of second lien loans. COVENANT-LITE DEALS RETURN Covenant-lite deals, often referred to as cov-lite, first became popular in 2006 when lenders were competing for business from borrowers such as private equity funds by requiring less onerous covenants, especially in leveraged buyouts. Although the terms of cov-lite 66 November 2010 practicallaw.com
loans varied from deal to deal, many cov-lite agreements eliminated financial maintenance covenants altogether or made them either springing (that is, where compliance is only required after a metric is triggered, for example, availability or EBITDA) or so generous that they were virtually meaningless. In addition, cov-lite deals often contained no restrictions on third-party debt or negative pledges, or used debt incurrence tests that are more commonly seen in high-yield instruments and, in some cases, allowed borrowers to elect to have interest capitalized (known as a PIK toggle). Further, if the agreement included financial maintenance covenants, it often included the right of the equity holder, commonly a private equity sponsor, to cure an event of default by injecting additional capital into a deal to count as EBITDA (known as an equity cure). As the subprime crisis unfolded in 2007, the issuance of new cov-lite deals came to a halt. Because their ability to monitor investments was significantly hampered by the exclusion of, or inclusion of virtually meaningless, financial maintenance covenants, many lenders who had already entered into cov-lite deals found themselves with little information and could not address deteriorating situations or limit their exposure. In the past year, there has been some indication that the cov-lite structure has reemerged, although on a limited scale. Many investors who are looking for higher yields from their investments are turning to high-risk, high-return loans. This has allowed some borrowers to bring cov-lite deals to the market. As of September 2010, seven companies had brought cov-lite deals to the middle market this year, including Smurfit-Stone Container Corp. and SkillSoft PLC (see Leveraged-Loan Returns at Year s High as Brickman Offers Covenant Lite, Bloomberg, September 24, 2010). While the volume of pure cov-lite deals remains low, several transactions have included springing covenants. As competitive pressures on lenders increase, it is likely that these more accommodating structures will become more common. DEBT BUYBACKS With the price of many companies debt on the secondary market trading substantially below par, many borrowers with cash on hand are attempting to purchase a portion of their term debt from lenders at the discounted trading price. This allows borrowers to reduce their overall leverage and interest expense, making it easier for them to meet their financial covenants. The following related Practice Notes can be found on practicallaw.com >> Simply search the title OR resource number Amend & Extends: When Non-Pro Rata is the Best Way or 8-386-4388 Asset-based Lending: Overview or 1-500-8019 Debt Securities: Overview or 4-383-2634 Loan Agreement: Prepayment and Commitment Reduction Provisions or 8-501-6488 Understanding Loan Buybacks or 7-385-0650 Typically, however, the assignment provisions of loan documents prevent these buybacks or treat the retirement of the loan upon a sale to a borrower or its affiliates as a prepayment that, under the pro rata payment provisions of the loan documents, would require the selling lender to share the proceeds of the sale with the other lenders. Amendment or waiver of these provisions requires either unanimous or required lender consent. Given these restrictions, several mechanics have recently been formulated and added to credit documentation to facilitate these buybacks and to address issues arising in connection with the borrowers or its affiliates ownership of debt, such as voting, amendment and consent rights. As term debt begins to trade again at prices closer to par, the ability to do buybacks will likely become less relevant due to the diminished economic benefit borrowers can realize through these transactions. >> For more information on buybacks, search Understanding Loan Buybacks and What s Market: Loan Buyback Amendments on our website. INCREASING LEVERAGE The acceptable level of leverage, which generally measures a company s total debt to its EBITDA, is on the rise in the middle market. Although current leverage levels are nowhere near their historical highs of the precrisis era, when some deals tolerated leverage as high as 8.0 times EBITDA, they are now higher than levels that lenders were imposing during the liquidity crisis. While the pre-crisis average leverage multiples in the middle market for the 12-month periods ended June 30, 2008 and June 30, 2007 were 3.43 times EBITDA and 4.21 times EBITDA, respectively, the average leverage multiple for the 12-month period ended June 30, 2009 crept down to 3.28 times EBITDA (see Market Segments: Covenant Levels, Loan Practical Law The Journal November 2010 67
Pricing Corporation, August 14, 2009 and Covenant Levels, Loan Pricing Corporation, August 14, 2008). Today, leverage is moving closer to pre-crisis levels, with most lenders preferring to cap total leverage at 4.0 times EBITDA in non-sponsored deals and 5.0 times EBITDA in sponsored deals (see Middle Market 3Q10 Review and 4Q10 Preview, Thomson Reuters LPC, October 8, 2010). Consistent with the loosening trend, some recent deals have tolerated total leverage as high as 6.0 times EBITDA, although these transactions are aberrations at this point. EQUITY CONTRIBUTIONS AND DIVIDEND RECAPS Consistent with the reduction in permitted leverage, lenders also have required sponsors to make and maintain a substantially higher percentage of equity than the market required in the pre-crisis boom years. During those years, sponsors routinely leveraged their portfolio companies with very little equity investment, often as low as 30% during the height of the market in 2007 (see Market Update, Debt Capital Markets, McColl Partners Investment Bankers, 2008). The financial crisis ushered in a tightening of this term to 51% on average in 2009 (see Inside the Middle Market, Brown Gibbons Lang & Company, August 2010). However, lenders again appear to be getting comfortable with lower levels of equity contributions as the average required levels have fallen to the 30% to 40% range going into the fourth quarter of 2010 (see Private Equity Rediscovers Leverage, Mergers & Acquisitions, August 31, 2010 and Middle Market 3Q10 Review and 4Q10 Preview, Thomson Reuters LPC, October 8, 2010). As competition among lenders increases, the expectation is for these percentages to reduce further, approaching near pre-crisis levels. A vivid illustration of the likely trajectory of the standards for leverage and equity is the resurgence of dividend recapitalizations (referred to as dividend recaps). A dividend recap is a transaction by which a borrower incurs new debt to pay a special dividend or return to its equity holders. The dividend recap is of mixed benefit to investors because although it provides the investors with a return on their investment without exiting the business, it increases the debt burden on the borrower. The dividend recap virtually disappeared in the immediate post-crash period. After a peak of 101 dividend recap deals worth $66 billion in 2007, the number of deals decreased to 11 in 2008 and six in 2009 (see Freaky Friday: The Return of the Dividend Recap, The Wall Street Journal, September 24, 2010). During both 2008 and 2009, the value of dividend recap debt transactions did not reach $4 billion. As of September 2010, however, there were already at least 57 companies that had issued over $23 billion in dividend debt this year (see Private Equity Thrives Again, but Dark Shadows Loom, The New York Times Deal- Book, September 29, 2010). This represents almost 9% of the total amount of leveraged lending and junk bond issuances during 2010 so far (see Dividend Rock: Firms Reward Buyout Bosses, The Wall Street Journal, October 14, 2010). This increase is due in part to proposed tax changes taking effect in 2011, which would increase the rate of taxation of dividends, but is also emblematic of the growing comfort of lenders with increased leverage and lower equity levels. Recent examples of how the middle market is evolving in this regard include: Metaldyne, a company created in 2009 to purchase substantially all of the assets of an embattled auto supplier in a section 363 sale in bankruptcy, will reportedly be entering into a new $225 million term loan facility to refinance acquisition financing and to fund an approximate $88 million dividend. HHI Group Holdings LLC, a portfolio company of KPS Capital Partners, recently issued $50 million of additional debt to fund a $50 million dividend to its shareholders, which was in addition to the $150 million dividend that the company paid to shareholders in April 2010. Ascend Performance Materials, a portfolio company purchased in 2009 by SK Capital for $50 million, recently announced that the company would issue about $1 billion in debt to finance a $922 million dividend. This transaction was reportedly shelved recently as a result of investor (not lender) concerns regarding the resulting debt and interest service burden. >> For more information on dividend recaps, search What s Market: Mid-year Trends in Loan Terms on our website. CALL PREMIUMS ON THE RISE Call premiums, which essentially function as prepayment penalties, have been a staple in bond and highyield deals. Traditional middle market financings, however, have not always included this protection. As the middle market attempts to attract a more diverse group of lenders, such as mutual funds, pensions and insurance companies (investors who typically want to lock in yield for defined periods of time), call premiums are becoming more common in middle market transactions. As of the end of September 2010, there had been at least 50 institutional term 68 November 2010 practicallaw.com
As recently as 12 months ago, middle market borrowers may have seen OID as low as 85%, but OID spreads have recently tightened to a level at or slightly below par as the primary and secondary markets become increasingly active and competitive. loans that included call protection this year alone (see Call Protections for Leveraged Loans?, Mergers & Acquisitions, October 3, 2010). Generally, these call protections are less onerous than their high-yield counterparts. For example, these call protections often only extend through the first couple of years of a facility or are limited only to refinancings and penalize prepayments at a relatively low rate. Although borrowers are typically loathe to agree to call premiums because they prefer to maintain the flexibility to prepay the loans at their option, these call protections can sometimes be leveraged for looser covenants, which is often of far greater benefit to a borrower in relation to relatively minor call restrictions. >> For more information on call premiums, search Loan Agreement: Prepayment and Commitment Reduction Provisions on our website. LENDER YIELD PROVISIONS Since the beginning of the financial crisis, many lenders have insisted on including a LIBOR floor in their credit facilities. These floors serve primarily as a guarantee of a minimum return to lenders and function to limit interest rate fluctuations. In the current conventional bank loan market, use of these floors (or, if used, the amount of the floors) is trending downward, although institutional term investors appear to continue to expect a floor of at least 1% to 2%. While spreads over LIBOR remain relatively flat or slightly down, the reduction or elimination of these floors may lower the effective interest rate on many loans while actual LIBOR remains below the artificial floor levels. For the base rate option, the trend continues to be to define the base rate to include a spread (typically 1% to 3%) over the 30-day LIBOR rate as a component of the base rate, both protecting lenders from spikes in the LIBOR rate and discouraging base rate borrowings. In addition, original issue discount (OID) spreads in middle market loans have tightened substantially since the height of the crisis. As recently as 12 months ago, middle market borrowers may have seen OID as low as 85%, but OID spreads have recently tightened to a level at or slightly below par as the primary and secondary markets become increasingly active and competitive. >> For more information on interest rate provisions and OID, search What s Market: Mid-year Trends in Loan Terms on our website. AMEND AND EXTENDS The immense volume of loans made between 2005 and 2007 to support the leveraged buyout boom scheduled to come due between 2011 and 2015 brings with it a potential liquidity crisis of epic proportion. Borrowers have been very aggressive in getting ahead of this impending refinancing crisis. The amend and extend has played an important role for both borrowers who face this impending liquidity crisis and lenders who lack deal flow. An amend and extend allows a borrower to keep its current financing arrangements in place, often with the same or slightly rearranged lender group and substantially similar documentation, but with an extended maturity date. These amend and extend deals also sometimes include provisions that allow a further amend and extend with majority lender consent (as opposed to a 100% lender vote). Although there is still risk in the credit markets as the wall of maturity approaches, amend and extend deals have helped to defuse much of the concern. >> For more information on amend and extends, search Amend & Extends on our website. REAPPEARANCE OF THE SECOND LIEN LOAN After falling out of favor during the financial crisis, the second lien loan, a type of secured financing where the second lien lender s security interest in the borrower s assets ranks behind the more traditional senior lender s security interest, has recently reappeared in the middle market. In fact, 14 second lien facilities totaling $2.7 billion had closed as of the end of July 2010 (see An Encore for Second-Lien Financing, Mergers & Acquisitions, August 31, 2010). Practical Law The Journal November 2010 69
Recent second lien deals include Credit Suisse s facility for SonicWALL and Goldman Sachs deal for American Safety Razor, a Lion Capital Portfolio company. Second lien loans tend to be pricier than their first lien counterparts due to the increased risk for the second lien lender because of its second priority position and practical lack of control over the shared collateral. However, these structures are generally less expensive than mezzanine or equity financing and seem poised to make a comeback, especially for traditional middle market borrowers where a high-yield offering is either not available or is too expensive or impractical to complete. which was passed in September 2010 and created a $30 billion government fund to encourage lending to small businesses, may also play a critical role in restoring the lending capacity of regional and community banks serving smaller middle market companies. In the end, lending activity and the evolution of middle market lending structures during the postcrash period will certainly continue to be shaped by various external forces, including legislation and the overall growth of the domestic and global economies. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the law firm with which they are associated. >> For more information on second lien loans, search Intercreditor Agreements between First and Second Lien Lenders: Overview on our website. WHERE IS THE MIDDLE MARKET HEADED? If current trends continue, the loan market for middle market companies looks promising for a return to normal in the foreseeable future. For the near term, it is likely that large middle market borrowers will continue to find financing more easily than those in the traditional middle market. Lenders, anxious to deploy their capital in a low demand environment, are facing pressure to accommodate attractive borrowers with increasingly favorable credit terms. Currently, smaller borrowers are not benefiting from these developments as their conventional sources of funding (that is, regional and community banks) cannot lend due to regulatory capital restrictions and ongoing portfolio problems. It would appear that the gradual economic upturn and increased M&A activity, especially in the equity sponsor world, may begin to drive middle market activity up again, although it is doubtful that we will see the deal activity levels of the pre-crisis boom era any time soon. Private equity groups, many of whom are sitting on significant capital to invest, are under pressure to make investments or return money to their limited partners and to take advantage of current tax laws that may change in 2011. This trend, if uninterrupted, should continue to fuel deal and borrowing activity. If secured middle market loans continue to yield attractive risk-adjusted returns, it is foreseeable that new investors will again enter this market and move downmarket seeking higher-risk, higher-return investments. Further, legislation, such as the Obama administration s community and small bank investment bill, 70 November 2010 practicallaw.com Use of PLC websites and services is subject to the Terms of Use (http://us.practicallaw.com/2-383-6690) and Privacy Policy (http://us.practicallaw.com/8-383-6692). For further information visit practicallaw.com or call (646) 562-3405.