The U.S. Federal Reserve raising interest rates has caused banks to pull back on financing, and that means merger and acquisition activity will slow in the coming quarters, according to a panel of financial experts, speaking during Seafood Expo North America.
The panel, on 14 March at SENA in Boston, Massachusetts, agreed higher interest rates and an uncertain economic situation will lead banks to be much more selective about lending than they were during the post-Covid recovery period when financing was cheap. However, Jason Brantly, a senior vice president and senior relationship manager at Bank of America, said banks will still want to help make deals if the numbers make sense.
“The pendulum has definitely swung from really aggressive lending and obviously cheaper lending rates, but banks are still eager to lend,” Brantly said.
The failure of Silicon Valley Bank on 10 March, and the subsequent failure of Signature Bank, were two of the three largest bank failures in U.S. history, but a lot of the money that was taken out of those banks didn’t just disappear, and Brantly said both Bank of America and fellow panel member John Doucette’sinstitution – M&T Bank – are likely going to see large deposits in the near future as people look for more-stable institutions. That means banks will have more money to reinvest in customers.
However, signs are pointing to banks paring back the amount of lending they do. The leverage B loan market pulled back in January and February as banks decided against loans with slightly higher risk, Brantly said.
“2022 was one of the lowest years in more than a decade, and we’re well below that pace,” he said. “I think what’s happened in the bank market in the last week will probably continue to make it where there is not going to be a lot of folks wanting to go to that market and access capital.”
A court decision finding fishing permits are a revocable privilege, rather than a compensable property, will also impact valuations for seafood companies with wild-catch operations. Depending on how the ruling gets interpreted, that may make it more difficult for companies with fishing vessels to access financing.
“If that becomes a precedent, that will have a substantial impact for those kinds of companies and their ability to access capital markets,” Brantly said. “We depend on that quota as collateral.”
More-expensive financing, coupled with an increasing reluctance from banks to lend to businesses, doesn’t mean merger-and-acquisition activity is off the table – as evidenced by the announcement that Cooke was acquiring Slade Gorton just hours after the panel took place.
“I think the appetite is still there. We’re certainly still interested in lending,” Brantly said.
Doucette said for many transactions requiring large amounts of financing, senior lending institutions aren’t the way to go.
“It’s very easy when rates are low to sit back and say, ‘Get everything you can out of that senior lender,’” he said. “But that term B stuff has just gone away, so now it’s time for the private-equity folks, the family offices. We’ve seen a lot of international activity in the [U.S.] Northeast coming in.”
Term A loans are amortized evenly over five to seven years, while term B loans have nominal amortization over the first five to eight years of the loan and then a large payment in the final year, making it less costly for the company getting the loan, but riskier for the bank in the long run.
Brantly said term B acquisitions are more difficult, but a creative business deal can still be struck – it just takes work and sound advice from advisors. The community development groups in Alaska that partnered with Maruha Nichiro to purchase nine pollock vessels, he said, are one example of groups coming together to make creative deals with unique structures that still accomplish merger and acquisition goals.
Softness creeping into the global economy will also more than likely force some businesses that fall into difficulty to pursue a sale.
“That’s what it’s going to take, is more folks either going together splitting up the deal, or coming together to hold assets in that kind of creative way,” Brantlysaid.
Antarctica Advisors Managing Partner Ignacio Kleiman said that those companies in tight spots should not wait to get in touch with an advisor if the predicted recession makes things difficult for them.
“Don’t wait to call somebody,” he said. “We have worked with many companies in the sector that went through financial difficulties. The smartest ones, they realize it right away, and they would call us or some other advisor.”
Getting ahead of liquidity problems early, and getting in touch with commercial banks early, can help stave off a bigger problem down the road.
“The main thing they are looking for is, do you have a plan?” Kleiman said. “They don’t want to take over your company. They don’t want to liquidate you. They like their clients, and we have done a number of transactions where we work collaboratively. But they want to see that you’re taking your situation seriously.”
Photo by Chris Chase/SeafoodSource