Crunch!
Who would have guessed that poor people, living in small towns you've never heard of in another part of the world, could have given Midland dealmaking the biggest jolt it has received in years?
In what would seem to be a classic case of chaos theory - where a butterfly flapping its wings in one part of the world causes hurricanes elsewhere - the problems in the US sub-prime market have caused problems far beyond the trailer parks and ghettoes: witness the near collapse of Northern Rock and the strains being put on the rest of the financial system.
Yet while this financial hurricane seems to be blowing down mega deals, the general feeling is that, bar a few cold chills and gusts, the Midlands dealmaking community seems to have escaped relatively unscathed.
Most pundits in the dealmaking community are still fairly bullish about the overall state of the Midlands. The general view is that, while megadeals have taken a battering, the mid-market deals in which the region specialises have been largely unaffected.
Paul Ray, partner at Browne Jacobson, says: "Although the issues in the US sub-prime market and interbank loans have had a serious impact on the debt funding of the large deals, these are not affecting the mid-market. 2007 has been a strong year for Midlands deals and, as a result, the acquisition finance teams of some lead banks in the Midlands hit their budgets by the mid-year point.
"However, despite the shocks to the banking systems, there has been no real cooling of banks' appetites in the mid-market, which remains buoyant."
Nor does Adrian Cutler, corporate partner at Cobbetts, believe that the credit crunch currently afflicting the global markets is going to have a real impact upon mid-market deals led from the Midlands.
He says: "As many of our deals are in the genuine mid-market, between £35-50m, we have found that the credit crunch has so far had little impact on our ability to structure deals. It's mainly the post-£3100m deals that have felt the squeeze.
"While there continues to be a strong will and drive to generate and lead strong mid-market transactions, I think the local corporate finance community will continue to support the right deals."
But other are cautioning that there may be a slow down at even the more workaday levels of the market. There is a feeling that some deals that might have gone through have been abandoned and many pundits report that the time needed to complete transactions seems to have lengthened as all sides become a little more cautious.
Mark Advani of Isis sums this up: "There do seem to have been a few aborted deals below £350m over the summer which can't be laid at the feet of the banks. I suspect that we are entering a slightly more jittery environment and this may be a feature of the market through to year end. I'm hopeful for a firming up not too far into 2008 though."
And Duncan Taylor, head of the corporate group at law firm Nelsons, says: "Looking back at the third quarter, we did perhaps see fewer completions than we had hoped for, but some of those deals have simply been deferred, which should mean that we can anticipate a strong finish to the year."
But while there is general agreement that the scale of Midlands dealmaking will continue relatively unaffected, the way deals are structured and financed may change radically.The banks have had a pretty unpleasant shock and, for the foreseeable future, may look to bury their differences and co-operate.
David Richardson, regional managing director at Lloyds TSB Corporate, says: "I think we'll see a return to traditional funding structures. There's no doubt that highly leveraged deals are being hit, but as that's not an area the Midlands has tended to get involved in."
Where Richardson and others do see major changes is in the way banks handle debt. Until the credit crunch the preferred model was for a lead bank to assume to debt, then syndicate it out.
Increasingly it looks if banks will club together at the outset to share the pain and risk as well as the glory.
The new stance of the banks - keen to do deals, but shy about doing it on their own - will of course have an impact on other parts of deal financing.
Andrew Millington, partner at Mazars, believes that if the banks continue to take a more risk-averse approach to funding, there could be an increase in other tried-and-tested ways such as loan notes, deferred consideration and, of course, equity arrangements.
But is it possible to become too obsessed with the credit crunch and the affect it is having on the dealmaking market? After all, there is a far larger economy at play beyond that of US sub-prime loans.
Alliance & Leicester's new regional director of corporate relationship banking, Patrick Pryce, newly arrived from Yorkshire Bank, thinks that we should not become too obsessed with the credit crunch. He believes that, despite a slight downturn in the economy, we will continue to be in a relatively low interest rate environment.
He adds: "What can the owner-manager learn from the recent experiences? Take the spike in libor (the rates at which banks lend to each other) during the Northern Rock crisis. Most larger loans are linked to libor rather than base rate. Many banking deals underwritten three years ago would have been agreed when base rate was down at 4.5 per cent and libor somewhere similar.
"When libor reached 6.75 per cent recently, compared with base rate of 5.75 per cent, the debt burden became far higher for some borrowers, highly leveraged or otherwise. But over the last couple of years most street-wise clients took treasury advice and executed hedging strategies. They've slept easily at night, knowing the rate they're paying is protected from the repercussions of the actions of others."
