At the beginning of 2007 retailers had just enjoyed a much better than expected Christmas and many banks were prepared to commit large sums of money to highly leveraged retail transactions. As a consequence prices being paid by venture capitalists (VC) were high.
By the second half of 2007 the picture looked very different as the credit crunch developed. With a reduction in institutional liquidity in the leveraged finance markets the volume of transactions supported by banks fell, especially at the higher end of the market.
So what does 2008 bring? Generally this is likely to be a challenging year, although we are also seeing some encouraging signs.
The market for retail leveraged debt should remain open for mid market deals. At the high end of the market, the backlog for leverage deals is immense and whilst liquidity is likely to return, the timing remains uncertain. The terms on which banks lent in 2007, both price and amount of leverage, increased and reduced respectively and this is unlikely to change in 2008. Consequently the price that a VC house is prepared to pay will either reduce, to enable them to achieve their financial returns, or they will have to accept lower returns. Price reductions will enable trade buyers to once again compete in the acquisition marketplace.
So what else? At present there is certainly less demand from retailers to borrow and this is likely to continue as they rein back on capital expenditure in order to conserve cash for the tougher times that are expected this year. Fortunately the high street is generally in good shape and this conservative approach should minimise the risk of failures. Banks will remain keen to support the sector but will, as ever, be looking to find the winners.
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