TKO Miller Debt Capital Market Analysis 

• Leverage multiples remain at peak levels in M&A transactions due to an aggressive lending environment and the low cost of debt
• Leverage multiples, as measured by Total Debt / EBITDA, increased from 3.9x in 2018 to 4.1x in 2019 (as depicted in the graph below)
• Leverage conditions are expected to remain highly supportive over the next 9-12 months, but trade tariffs with China and Europe, a global economic slowdown, or uncertain political conditions are capable of shifting conditions back to lower, more historic levels
• The aggressive growth initiatives for both strategic and financial buyers, and a greater ability to fund acquisitions will remain strong
• The debt market is a key driver of M&A valuations; valuations will decrease when leverage multiples fall, and the cost of debt increases
• Transactions are seeing decreased equity contributions in response to rising leverage multiples compared to 2018 levels (as depicted in the graph below)

Total Debt/EBITDA Multiples 

Source: August 2019 GF Data Leverage Report

Debt and Equity Contribution by Year

TKO Miller Recent Debt Financing Transaction 

TKO Miller advised TJ Hale Company on the successful closing of new debt financing, which will be used to support its growth and working capital needs. The debt package included a revolver, an equipment loan, and a cash flow term loan. For nearly 70 years, TJ Hale has been a leading provider of retail fixture solutions for some of the world’s top brands. Its diverse areas of expertise include precise craftsmanship, value engineering, project management, warehousing, shipping, and installation. The Company has earned a stellar reputation for quality, excellence, and on-time delivery, which has allowed the Company to be a value-added partner to the leading retail, entertainment, and hospitality clients, globally.

TJ Hale engaged TKO Miller to identify a new capital partner who could provide the flexibility required for the Company to continue its strong growth trajectory.  “TJ Hale had a strong and impressive sales backlog from some of their long standing, blue chip customers, as well as many new customers in the pipeline,” said Steve Yahnke, Managing Director, TKO Miller. “The Company needed to replace its existing debt with a lending partner who understood the Company’s future growth plans and objectives.”

After being engaged, TKO Miller assisted TJ Hale in determining the appropriate capital structure that would be required to support working capital needs and future growth initiatives and identified the most appropriate senior lenders who could meet these needs.  TKO Miller conducted a targeted and efficient process that allowed TJ Hale to achieve its ultimate objectives. The winning proposal provided TJ Hale with the availability and flexibility it needed to fund its future growth initiatives.

“TKO Miller procured multiple, competitive proposals for the transaction,” said Michael Sharp, President and CEO of TJ Hale.  “In the end, we were very impressed with the final financing structure and the attractive economics of the deal. The new financing from UMB will provide TJ Hale with the flexibility to continue its rapid growth.” [LINK] 

Interest Rate Update

• In order to avoid an economic downturn, the Federal Reserve recently lowered interest rates by 25 basis points in July and another 25 basis points in September for the first time since December 2008, after raising rates nine times starting in late 2015
• Recent FOMC guidance suggests that although recent government reports indicate that the economy remains on solid footing, rates had to be lowered as a precautionary measure, to spur consumer and business spending before the economy falls into a recession
• The government decided to take action due to the uncertainty around trade tariffs, low inflationary pressures, and potential global weakening. The risk of the Fed lowering interest rates is that if the economy moves into a recession, the Fed may be disarming themselves of some possible ammunition it would need to continue to lower rates and it may also create dangerous bubbles in other risky asset classes
• The most recent Yield Curve has less than a 50-bps spread between the 1-mo. UST and a 30-yr UST signaling that this flattening could mean an economic downturn is on the horizon but may be halted with lower, shorter-term interest rates (depicted in the graph below)
• The annual inflation rate was relatively stable in Q2 at 1.6% compared to 1.7% in Q3, and is below the Fed’s target level of 2.0%
• Now may be a good time to remain flexible and not fix long-term interest rates in case the Fed decides to further reduce interest rates (as depicted in the graph below). Commercial banks and asset-based lenders may be a good option now, as they both provide the most flexibility, and, until the debt markets stabilize a bit, I would recommend utilizing a line of credit vs. fixed rate debt
• With more potential rate cuts coming over the next 3 to 6 months, the US economy, although growing at a slightly slower rate, will still see positive growth, and will not fall into a recession due to low unemployment rates, strong wage growth, and robust job gains

Daily Treasury Yield Curve Rates

Source: U.S. Department of the Treasury 

10-Year Treasury Rate 

Source: U.S. Department of the Treasury 

About TKO Miller

TKO Miller, LLC is an independent, advisory-focused, middle market investment bank. With over 130 years of collective transaction experience, TKO Miller provides merger and acquisition and financial advisory services for privately-held and private-equity owned businesses, with a special focus on family-and-founder-held businesses.

TKO Miller aims to bring value to clients by combining outstanding people with a results-oriented, flexible approach to transactions. Our services include company sales, recapitalizations, asset divestitures, and management buyouts. TKO Miller has a generalist focus and has served clients in a wide range of industries, including manufacturing, business services, consumer products, and industrial products and services. For more information, visit our website www.tkomiller.com