High Deal Prices Could Make Midsize Sector Tricky

Just as banks are pouring resources into providing midsize companies with capital markets access, some experts are sounding cautionary notes.

The rising stock market has pushed up the price of acquisitions, which could make some deals tricky to finance, these experts say. At the same time, middle-market financing is becoming increasingly competitive, as commercial and investment banks struggle to win deals in this lucrative market.

"In today's market, because prices are getting to be higher than what you can justify on the basis of fairly straightforward asset or cash-flow analysis, almost every deal has to be somewhat creative," said Gabor Garai, a managing partner in the Boston office of Epstein Becker & Green.

Mr. Garai said that banks have to "stretch a little" without compromising their underwriting standards in putting deals together.

To be sure, experts saw little cause for alarm, but maintained that middle-market finance is not without its competitive challenges.

"The marketplace is getting more crowded as some of the investment banks are moving more aggressively into the middle-market arena," said Steven Cohen, a lawyer in the firm of Cadwalater Wickersham & Taft. "The large commercial banks, money-centers, and the other large lending institutions appear to be beefing up the middle market more than they may have in the past because the returns in this arena are so attractive."

Nonetheless, bankers said they saw few red flags.

"In spite of all the talk about more liberal structures and compression of pricing both for equity sponsors and lenders, there's still a fairly wide band of credible business to be done," said Larry S. Zilavy, a senior vice president at IBJ Schroder.

"Serious lenders and serious equity providers are not intimidated by the possibility of a correction if and when the economy slows," Mr. Zilavy said.

"Overall, the lending activity remains prudent," said Mr. Cohen. "Inevitably, there will be a downturn, and some of the transactions being done today will need to be restructured."

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