By Leela Parker Deo

NEW YORK (Reuters) - Lending to U.S. mid-sized companies is poised to increase in the second half of 2016 as lenders report a growing pipeline of M&A deals and expectations for a push ahead of the U.S. election, market participants told Thomson Reuters LPC.

After two dismal consecutive quarters this year amounting to a total of US$52.74bn—the lowest first half volume since 2009, and the fourth lowest first half since the turn of the century—lenders and investors that provide debt capital to middle market companies are confident that the tide is turning.

“Bankers and private equity sponsors are starting to see a pick-up in the number and quality of deals in the pipeline,” said Jeremy Swan, principal at accounting, tax and advisory firm CohnReznick.

This comes as welcome news for deal-starved investors eager to put money to work in a crowded and highly competitive lender field that has been characterized by a significant supply-demand imbalance so far this year.

Even as Britain voted in favor of leaving the European Union, roiling global financial markets and introducing a new element of economic and political uncertainty, the U.S. middle market—seen widely as being well insulated from the tumult because of its primarily domestic focus—was unphased.

In contrast to large public companies whose complex international supply and distribution networks leave them more exposed to the non-U.S. business cycle and exchange rates, middle market companies generated 87% of their revenue domestically in 2015, said Lara Rhame, senior economist at Franklin Square Capital Partners.

Furthermore, of the remaining 13% in middle market revenues earned abroad in that period, only 3% of middle market revenues came from Europe during the same period, she said.

NEW MONEY

A handful of acquisition and buyout-related middle market deals was being shopped just before and after the Brexit vote, and met with ample investor appetite. At least one got inked at a spread less than the 500bp over Libor threshold, an indication that lenders did not see the volatility unleashed by Brexit as dampening sentiment among middle market lenders for credits they like.

“Deals are selling on credit, not liquidity,” said one banker.

Automotive and truck parts distributor Parts Authority tapped lenders for a US$195m acquisition credit facility that backs the company's sale to private equity firm the Jordan Company. BMO arranged the deal, joined by BNP on the right.

The deal launched ahead of Britain's June 23 vote to exit the EU, and commitments were due on June 27. Demand for the loan was not impacted by the timing, nor did pricing change, sources said.

Rather, the sources said the deal was well oversubscribed, attracting both banks and institutional investors, illustrating the strength of appetite for new money transactions in the middle market.

The acquisition financing is split between a US$50m revolver and a US$145m term loan B. Pricing on the TLB cleared at 475bp over Libor with a 1% Libor floor and 99 original issue discount.

During the same period, Olympus Partners tapped a lender group led by Antares Capital for US$215m in financing to back the acquisition of AmSpec Holding Corp, a company that provides testing, inspection and certification services for petroleum traders and refiners.  

Bank of Ireland, ING Capital and NewStar Financial led the deal with Antares, joined by some additional investors, sources said.

The financing includes a US$25m revolving credit facility, a US$170m term loan and a US$20m delayed draw term loan. The spread on the term loan is 500bp over Libor with a 1% Libor floor. The original issue discount is 99.

Senior leverage is 5.0 times and total leverage is 6.0 times, the sources said. The financial sponsor provided the junior capital in the form of mezzanine debt.

Incline Equity Partners was the selling majority shareholder, Olympus said in a July statement. Terms of the acquisition were not disclosed.

Macquarie Capital arranged a US$73m term loan backing Northstar Travel’s sale to Wasserstein Partners from Wicks Group. The deal also launched before Brexit and commitments were due June 27. Pricing on the loan, which allocated late last week, is 625bp over Libor with a 1% Libor floor and 98.5 original issue discount. Leverage is 3.5 times, said sources.

Charcoal maker Royal Oak Enterprises also raised a new acquisition term loan backing its sale to Mariposa. The company raised a US$325m term loan, priced at 475bp over Libor with a 1% floor. SunTrust led the deal.

For borrowers that decide to pull the trigger on M&A-related transactions this summer and into the fall, there is no shortage of available capital, and a broader group of investors is eager to put money to work.

The middle market lending landscape has deepened in recent years as a new class of alternative debt providers, business development companies and direct lending platforms, have transformed the asset class, positioning themselves to step in where traditional banks, constrained by heightened regulatory oversight, are pulling back.

Though Brexit vote-related volatility is not expected to halt newfound M&A momentum, the looming U.S. presidential election is likely to produce a period of uncertainty that could lead to an additional push to wrap up deals before the November 8 contest.

“If I’m going to do a deal, I would want to get it done before November, particularly on the heels of Brexit,” said one middle market lender of the mindset among private equity sponsors and corporate issuers considering whether or not to push forward with a sale or acquisition.

SPONSORED TRACTION

Larger companies flocked to the syndicated loan market in the second quarter in an effort to lower borrowing costs, setting off a fast and furious wave of refinancings that sent U.S. syndicated lending up 55% from a four-year low in the first quarter.

The middle market, however, did not see the same spike in refinancing transactions that buoyed large corporate volume in the second quarter.

At just US$26.6bn, the quarter’s overall middle market loan issuance was up a slight 2% from the US$26.1bn inked in the first quarter, but down 35% compared to the year earlier period.

And while total middle market new money issuance was down 21% from the first quarter, the sponsored segment showed some traction already in the second quarter. Total sponsored volume was up 17% from the first quarter, sponsored new money issuance also improved by 17% for the same period and leveraged buyout volume jumped 41% quarter over quarter.

(Reporting by Leela Parker Deo; Editing By Michelle Sierra and Lynn Adler)