The recent volatility and uncertainty in the financial sector has caused the credit spigot to tighten as wary lenders and investors pull back. This is not necessarily bad news for lower mid-market firms, as their access to funding has generally not diminished except for credits in problematic sectors such as oil and gas.

“We are definitely seeing tightening across credit markets due to concerns over the global economy and volatility in the stock and broadly syndicated markets,” says John Finnerty, a group head at NXT Capital Corporate Finance. “These factors are giving lenders a little bit of pause as we are seeing credit standards tightening.”

He says that for credit facilities that are less than $150 million, companies are able to get those done comfortably without any gaps. But for larger facilities, those that are more broadly syndicated, financing becomes more challenging.

Clearly, when it comes to lenders extending credit, the size of the deal counts. According to John Sherman, a portfolio manager, Opportunistic Loan Strategy, at DDJ Capital Management, LLC, they have not seen the banks tighten credit to mid-market deals so far. “The tightening that we’ve seen has been largely in larger and more aggressive capital structures,” he says. “Middle-market deals in the $50 million to $250 million range are generally more conservatively capitalized and thus usually clear the market.”

For larger transactions, the issue has been in obtaining financing for the junior capital part of the financing structure.

“Banks are being more hesitant towards committing to the junior debt tranche for mid-market companies with deal sizes in the $300 million to $500 million range,” Sherman says. “Because of this, companies and/or private equity sponsors have been reaching out to buysiders ahead of syndication so they can pre-place that tranche of debt.” He adds that they saw this trend start in 2015 and escalate in intensity this year.

Charlie Perer, a director at Super G Funding, says that there is a definite tightening in the institutional second lien market, defined as companies that generate greater than $10 million of EBITDA, as well as non-institutional, which comprises smaller companies that have fewer options.

“Institutional tightening is typically driven by macro-economic trends, whereas non-institutional is driven by other factors that pertain to company level rather than industry,” Perer says. “Junior credit tightening in times of economic uncertainty should be expected, especially in light of recent Fed moves as institutional funds manage risk on a macro level whereas smaller funds do not.”

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Originally appeared on Axial Forum