Will market volatility scupper deals in the making as sourcing funds gets harder?

If a buyer does not know the cost of its debt, it makes completing a deal a tough ask.

Some or all of Australia’s top four banks are understood to be refusing to lock in debt pricing terms on mergers and acquisition deals because of the market volatility, casting further doubt on whether live deals currently in the market will proceed.

Private equity firm Pacific Equity Partners and its advisers are continuing to work on its takeover bid for Village Roadshow, currently valued at about $1bn, including debt, while it is also thought to be the case with rival suitor BGH Capital, which has put forward a slightly higher offer.

However, sources spoken to by DataRoom say that sourcing funds from Australia’s top four banks has now become tougher, with the financial powerhouses refusing to lock in rates for deals that may not be finalised for several months.

While pricing could be set for a few weeks, any longer is believed to be proving difficult.

Margins have moved over 100 basis points for debt, and with quantitative easing expected, they are likely to contract.

The current problem is that the market is currently so volatile, banks do not want to get caught if a client walks away from a loan.

A lender faces the prospect of the margins moving 100 basis points over one week and a further 50 basis points over an additional seven days.

It continues to leave a question mark over the takeover bid for Village Roadshow, which may source funds from Australian financiers.

The thinking is that securing debt from offshore funders will become even more difficult, which continues to leave many questioning about Caltex and Healius, and some suspect the Term Loan B market in the US will be shut.

If a buyer does not know the cost of its debt, it makes completing a deal a tough ask.

The general feeling around the market on Thursday after the market plunged even further on news that the US was banning European travel was that the pause button has been hit right now on most transactions, despite talk some will still complete.

Another major concern will be around private equity firms that have struggled to stage exits from their investments of late.

Some predict that the equity values will fall by about 30 per cent, leaving some in a position where they could default on their debt.

Groups such as Archer Capital and Quadrant Private Equity owns companies in industries facing challenging conditions, including car dealerships, aged care, media, retail, restaurants and tourism.

Quadrant was about to start the sales process of its Journey Beyond domestic tourism business that owns the iconic Ghan and Indian Pacific rail expeditions and had earlier mulled a sale of its Rockpool business operating in the struggling restaurant sector while attempts were made to sell its portfolio of gyms last year, but those were placed on hold.

A saving grace could be that debt funding became so competitive in the past two years amid a low interest rate environment, that some banks may have waived terms that enabled the lender to demand a full loan repayment if payments are missed.

However, others say that buyout funds are cashed up.

In the global financial crisis (GFC), they bought back the debt from the banks and still made a windfall on their investments.

The bigger winner could be distressed debt funds, that are soon likely to have a plethora of opportunities to pick through.

Meanwhile, one of the differences between the current market crisis and the GFC is that there was a large amount of forced selling among unlisted debt funds for redemptions.

However, since that time, exchange traded debt securities and exchange traded funds accounts for much more debt here.

Europe, though, has proved not to be the case, with a forced market sell-down on Wednesday with investors meeting debt redemptions.