It has been a blast getting the firm off the ground this quarter. I appreciate all of the people that have made time for conversations, been generous with connections and intros, and very much appreciate the initial clients that have mandated the firm on projects.
Fountain Gate’s value proposition of independent advice, unrivalled focus, and efficient delivery is resonating with founders, management teams, and financial sponsors. I can’t wait to see what the rest of the year holds.
2Q23 Key Takeaways
Higher cost of capital/financing cost inflation is killing leveraged middle market borrowers:
Operating businesses may or may not have had the ability to pass through COGS/SG&A inflation during the last ~18 months of elevated costs.
Very few levered, floating rate borrowers have had enough pricing power to offset benchmark increases from 1m LIBOR sub 10 bps at FYE21 to 1m SOFR now over 5.00%.
This rate move has offset even heroic operating margin $/% expansion at certain levered borrowers with pricing power in their operating businesses, and is resulting in much weaker debt service coverage metrics that will create complexity during new financing transactions and necessitate amendments & extensions.
Banks/private credit lenders are saying they are ‘open for business’…
…while imposing return requirements or dialing back risk appetite such that only highly desirable pieces of new business are getting through approval committees, and support even for existing clients is uncertain.
It is clear that regulated banks are running the lending sides of their businesses reflecting some or all of the greater uncertainty around (a) the macroeconomic environment, (b) deposit/capitalization stability, and (c) expected increases in regulatory scrutiny.
In private credit, lenders have had the ability to move ‘up in quality’ from a credit perspective and increase spreads as banks pull back. Junior capital providers report better attachment (entry leverage) points for their investments, and that many sponsors are revisiting senior/junior structures after a period of executing stretch senior/unitranche deals due to concerns over cash interest burdens. Credit quality of what private credit lenders are seeing is mixed and everyone in the deal ecosystem would like to see more M&A.
There is clear value to borrowers of independent advice in the current environment:
In Fountain Gate’s first ~120 days I’ve seen three or four scenarios where longtime incumbents have not been exhibiting client first orientations for businesses that are performing well due to internal issues at their legacy institution.
This is a credit environment where borrowers need to have an independent advisor acting in their best interests, and help them put their best foot forward during new transactions or amendment situations. Fountain Gate Advisors is standing by to assist.
Thanks for reading. Please reach out if Fountain Gate can help with any situations your business or portfolio company is navigating. Looking forward to staying in touch the second half of the year!