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Mid market companies face tougher challenges than larger companies when it comes to refinancing their businesses. The larger companies have more options and better pricing on refinancing debt and equity. Mid market companies also do not have the political clout to secure bailouts like the large banks and auto companies. While things are less severe in Canada than the US, Canadian mid market companies are still finding it tougher refinance than a few years ago despite assurances by bankers that they are actively lending to the mid market.

Approximately 40% of mid market companies have a balance sheet problem They have too much debt. In the short term they are securing bank support to move outside certain covenants, extend amortization levels and interest payment relief. However the longer term options include finding more equity, accepting slower growth to conserve cash and accelerating debt repayments.

Real estate can be a saviour or a boat anchor. One client, a mid market commercial printer in Canada, was able to restructure and refinance their business because the value of their factory had increased since they had last refinanced the business and therefore they were able to secure additional finance to restructure the business. Another client, a Canadian fabricating and forging operation, was able to purchase a solid US forging business for a significant discount because the US company could not secure the necessary finance to continue their growing business.

About 40% of mid market companies are being required to top up the equity in their balance sheets. This is a normal expectation when things have not gone well in the business but in these times some bankers are even requiring good businesses to increase their equity positions.

Private equity pools traditionally hold investments until the markets are hot before exiting their portfolio companies. Many companies that were sold at 6 to 9 times EBITDA (earnings before interest, taxes, depreciation and amortization) are now faced with the prospect of an exit at 3 to 5 times EBITDA and so they are holding their investments until the market returns to higher EBITDA multiples. Shareholders of mid market companies are also doing the same which means the mid market merger and acquisition market is not expected to come back quickly.

It will be harder for companies to seek bankruptcy protection ( Chapter 11 in the US or CCAA in Canada) as there are few DIP financiers around to support these companies going in or getting out of bankruptcy protection.

The glass is half full! A study of mid market companies by GE Capital in 2010 found that 54% of CFO’s predicted their profits would rise in 2010 even though they have a negative view of the current state of the US economy.

Some Canadian mid market companies are taking advantage of their better credit situation to undertake investments in the US, however the very strong Canadian dollar, US companies are finding exporting to Canada is now becoming more attractive and in some cases investment in Canada is attractive due the more stable banking system and credit availability.

The jobless rate (US 10% and Canada 8.5%) will not come down significantly until the 40% of mid market companies that are still hampered by credit restrictions start to grow and according to US Census data these mid market companies represent 28% of the jobs.

Overall many mid market companies are worried that they economic storm may not have passed, but they are in the eye of the storm and things will not improve for the mid market until these companies are able to refinance significant portions of their term debt in the next few years.

Stuart Morley and his firm (http://tinyurl.com/yzkhor8) BRSJUMP are recognized experts in refinancing mid-sized companies. The firm has offices in Scottsdale, Arizona and Toronto, Canada. Go to his website for more information including video clips, articles and order his recently co-authored book (with Gordon Griffiths and Morris Slemko) called Weather the Storm. Survival Guide for Mid Market Organizations.