By Bobby Guy

It has been almost exactly a year since Waller Lansden opened this blog, with an article entitled "Liquidity and Healthcare."  That opening blog discussed the effects of excess liquidity in the healthcare market.  Now, a year later and in the midst of a widely-recognized liquidity crunch, the economics of the healthcare market have shifted significantly.
 
Interest rates have continually dropped, but as they have, healthcare lenders have widened the spreads at which they loan, and have reinforced their lending standards.  The result is that borrowing is much more expensive now than a year ago.  The pendulum swings, and it has swung from one pole of "irrational exuberance" to the other of "fearful caution."  The mergers and acquisitions market is one area that has been dramatically affected: many healthcare equityholders still want 2006/first-half 2007 prices for healthcare businesses, while healthcare purchasers want the lower price multiples that reflect the new market.  And without them they cannot buy, because their lenders are only willing to lend at lower multiples.  For example, lending multiples that a year ago sat at 5-7 times cashflow at the highest ranges, have now dropped to 3 or 3.5 times, or even slightly less.  What will be the results?  Some predictions in the next blog.