Optimism overcomes jittery markets

Corporate financiers remain stoic in the face of falling stock exchanges and
warnings of a debt market collapse, and are confident that, despite these fears,
conditions for deals will remain buoyant.

Senior dealmakers, including Alchemy Partners head Jon Moulton and Sir Ronald
Cohen, co-founder of Apax Partners, have warned of a collapse in the
leveraged-loans market.

Stock markets have also been shaky, exacerbating concerns that corporate
finance could be in for a slump.

A number of experts in the field, however, believe that despite the portents
the fundamentals underpinning the market remain strong and show no signs of a

Steve Halbert, head of middle market corporate finance at KPMG, says that
despite ‘stock market jitters’ business remained eager to expand.

‘Confidence is high, cash flow is strong and financing conditions are
favourable,’ Halbert says.

Harvey Hoogakker, assistant director of debt advisory services at Ernst
& Young, says the concerns over a collapse in the debt markets are based on
the high debt to earnings multiples on deals rather an actual drying up of debt

‘At this point in time, the concerns raised about a collapse are based on
fear rather than actual observation,’ Hoogakker says. ‘The concern is that with
the steady increase in leverage levels, lenders are taking on positions that
cannot be sustained, which will swing the pendulum the other way to a credit

Hoogakker adds that as long as defaults remain low this scenario is unlikely
to materialise.

‘Commentators were predicting that leverage levels were unsustainable two
years ago, but as long as defaults are low, there will still be liquidity and

This is a view shared by Halbert, who says that deals are structured more
carefully than during the last M&A boom. He says more equity is going into
deals, which is reducing the risk of failure.

‘Many commentators have been calling the top of the market for some time, yet
we appear to be hitting new levels with no sign of arrest. Many predicted we
would run out of road but the landscape has changed to keep pace,’ Halbert says.

Robin Lincoln, a director at private equity house HgCapital, believes the
major challenge for the industry is not a collapse in the debt markets, but
rather choosing the appropriate levels of leverage for different companies.

‘Some companies can handle leverage of seven to eight times EBITDA. Others
can only sustain lower levels, but are loaded with too much debt and that is the
major concern,’ Lincoln says.

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