Rlpc outlook uncertain for us middle market loans

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US middle market loan activity has held up well so far this year, but the worsening European debt crisis and fears of a flagging global economy mean the outlook is uncertain at best, bankers said. After a dismal first quarter when middle-market sponsor-backed issuance totalled just $9.73 billion, volume grew significantly in the second quarter, with $14.49 billion, including $2.37 billion in the pipeline, agreed in total, according to Thomson Reuters LPC data. Stronger leveraged buyout volume in the second quarter and a June rally in dealflow helped drive overall sponsored volume, but the growth is expected to be short-lived. General economic concerns are weighing heavily on the minds of investors, lenders and financial sponsors, and many market participants believe current concerns are more fundamental than last year, when the European banking crisis set off fears of a global liquidity crisis. The unease now includes the wider implications for growth expectations, consumer confidence and the impact on demand."In a scenario where the macro environment turns negative, what are the growth prospects, how much cashflow does the business generate and what are the other demands on cashflow?" asked one banker.

The uncertain environment has led to a persistent divergence in views between buyers and sellers on price and multiples, which has ultimately caused a drop in the number of deals - some have fallen away over price and others have been lost to strategics or to other sponsors as a result of competitive auction processes."Sellers have to get realistic on pricing. But no one wants to sell at nine times today if the market is about to begin clearing at multiples of 11 times," said Rich Farley, leveraged finance partner at law firm Paul Hastings.

EXCESS CAPITAL One silver lining for lenders is that, with a relatively sparse supply of paper, there is excess capital on the table. Investors are hungry for yield and keen to put money to work, but competition among lenders battling to take larger holds means some deals are being taken down by just four to five lenders, or clubbed by two or three for smaller deals.

Another more positive note has been the resurgence of Collateralised Loan Obligations