Before this fall’s stock market crash, mergers-and-acquisitions activity remained steady among private equity firms that focus on middle-market and small-market companies. Although the giant private equity firms—think Blackstone Group and KKR & Co.—may have slowed their activity this summer, midsized players like Arcapita Bank of Bahrain, and Navigation Capital Partners and VVS Capital, both of Atlanta, continued to swing deals. Arcapita acquired CEPL, a European warehouse logistics service in August, while Navigation and VVS teamed up in May to purchase Brown Trucking Co.

Now even that segment of the M&A world has dried up. King & Spalding partner Ray Baltz [left] in Atlanta, who is co-chair of the law firm’s private equity practice group, discusses the factors that have forced private equity firms to sit on billions of dollars of capital, with nowhere to place the money. The conversation has been edited for brevity and clarity.

Private equity firms have raised billions of dollars in capital, and it’s waiting to be invested. Are private equity firms sitting on the sidelines, waiting to make acquisitions, until the market normalizes?

Private equity firms continue to look for attractive investment opportunities. That’s what their organizations are set up to do. A large part of what’s going on is that there are not very many attractive business being put on the market for sale in this environment. If you are a business that is at all tied to the credit markets or to the housing industry, you are in a nuclear winter. Now is not the right time to put yourself up for sale, unless it’s a truly distressed sale. And there are some private equity firms that look at nothing but companies in distressed situations.

Even for healthy businesses, now is not the time to sell either. If you operate in an otherwise stable industry (not housing and not tied to the credit markets), and your business hasn’t declined at the same rate as valuations on Wall Street have declined, it’s still not time to put your business up for sale.

If you are a private equity firm or a buyout group, it’s not that you are unwilling to buy, it’s that there aren’t a lot of businesses on the market available to buy.

I also think sellers are being advised, perhaps incorrectly, by some investment bankers or financial advisers that because there is no leveraged financing available, if you put yourself up for sale, the private equity firms won’t participate in a sale process and you won’t get fair value.

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With the unprecedented upheaval in financial markets causing a near-lockdown in global credit markets, Deal Watch Blog called Chris Molen, a partner with Paul, Hastings, Janofsky & Walker in Atlanta, to discuss how the chaos on Wall Street is affecting corporate borrowers.

Molen advises clients on financing mergers and acquisitions, asset-based financing, cash flow lending, structured finance and restructuring senior debt financings. Molen’s clients have included Bank of America, Toronto-Dominion Bank, SunTrust Banks and Wells Fargo.

The conversation was edited for brevity and clarity.

Various news reports have said that the global credit markets have virtually locked down. Can you comment on what you’re seeing in the market—who can find financing and what lenders are providing credit right now?

The AAA investment-grade type companies can still find financing. I’m talking about long-term credit facilities of one year to five years, term loans of one year to seven years, your traditional corporate loans. Probably there are solid [privately held] companies with a long track record and who have a relationship with their lender; they may be able to find some financing.

What the big banks’ philosophy is right now is that the deal has got to be really solid from a credit perspective. A deal has also got to have the prospect for other fee opportunities—providing advice on future bond issues, or cash management, some other kind of fee income. A bank wants a customer whose credit is beyond reproach and for whom they might be able to pick up other fee-earning opportunities.

A couple of years ago, even five years ago, there was plenty of money chasing deals. Lenders—banks, hedge funds, others—were quite happy to simply make loans and not worry about other fee income. That’s not the case now.

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Back in early 2005, when credit was cheap, lenders couldn’t float loans fast enough, but critics say they approved mortgages with little regard for a borrower’s ability to pay back the debt. Investment banks bought billions of dollars of the loans and re-packaged them into mortgage-backed securities, which they then resold to other investors.

Two other key players were Fannie Mae and Freddie Mac, government-sponsored entities (GSE) that own or back about $5.3 trillion, or about half, of the U.S. mortgage market. Fannie and Freddie bought mortgages from banks and other lenders, which freed up the lenders’ money so they could make more loans.

Then, in 2006, the bubble burst. Mortgages became distressed or went into default. Foreclosures increased, and the value of investments secured by those mortgages collapsed. That made mortgages more difficult to obtain. Home values deflated.

Last month, President George W. Bush signed a law designed to clean up some of the mess. The Federal Housing and Economic Recovery Act of 2008 authorizes the Treasury Secretary to invest directly in Fannie and Freddie, and it establishes tougher regulations for the GSEs. Also, the GSE’s must abide by minimum capital requirements and limit the size of their portfolios.

Kilpatrick Stockton litigation partner Mike Crisp of Atlanta heads his firm’s complex business litigation practice group and represents a national bank in litigation against financial institutions related to securitized mortgages. Crisp also heads Kilpatrick Stockton's subprime and credit markets litigation practice group. He discussed the federal bailout of Fannie and Freddie and the outlook for subprime mortgage crisis-related litigation. The conversation was edited for brevity.

How did Fannie Mae and Freddie Mac get into their current predicaments?

On the surface, it was a perfect storm of financial circumstances and bad government. Credit was supplied too readily to unworthy borrowers. It also led to an increase in borrowers with uncertain prospects of making the mortgage payments they agreed to make.

If you dig deeper, the reasons are more systemic and the federal government’s responsibility is great. Prior to 1968, Fannie was a public entity with a public purpose—ensuring liquidity to allow maximum access to home ownership. But in 1968, Congress amended Fannie’s charter to make it a private entity. There was always tension with a private entity serving a public purpose. [Freddie Mac was established as a private GSE in 1970.]

But Fannie remained a government “sponsored” private entity. Nobody has ever been quite certain what “sponsored” meant. Does it mean “guaranteed” or something less? This probably contributed to the current problems because management likely believed that it was immune from the consequences of bad decisions, or that the government would step in and mitigate those consequences. It turns out they were right.

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Now is not a good time to be a bank.

Losses on residential construction loans and the ongoing credit crunch has hit banks of all shapes and sizes, from super-regionals like SunTrust Banks and Wachovia, to community banks like Alpha Bank & Trust in Alpharetta. And with debt financing more difficult to obtain, banks are struggling to raise capital.

Investors have taken note of banks’ problems. On Monday, SunTrust shares fell to $30.92, their lowest price since September 1995. Shares of First Horizon National Corp., the biggest bank in Tennessee, at one point Monday dropped to $5.88, its lowest since September 1991.

Other banks are also struggling mightily. Shares of Wachovia, BB&T Corp. and National City Corp. of Ohio have all declined this year. Shares of Washington Mutual Inc., the biggest U.S. savings and loan, have fallen 85 percent in the past 12 months. Fifth Third Bancorp shares have dropped 69 percent in the same period.

Deal Watch Blog spoke with Nelson Mullins Riley & Scarborough partner  Brennan Ryan about the state of the banking industry. Ryan, whose clients have included Congaree State Bank of South Carolina and Atlantic Southern Bank of Macon, Ga., said the worst isn’t over and he expects some Georgia banks to fail this year. Here is an edited transcript of the discussion.

Why is now such a bad time for banks?

A multitude of reasons. One is the credit crunch, which created the mortgage crisis, which then created a lack of demand for developed properties. Also, the Fed’s rapid reduction in interest rates caused a margin squeeze for banks. Banks make money on the difference between what they lend out and what they have to pay their depositors. With the Fed’s rate reductions, banks’ loan rates re-set faster than their deposits.

Think of it this way: If you have a construction loan with a customer that’s at a prime rate, it resets when the Fed changes the prime rate. It will work itself out over time, as certificates of deposit and other borrowings re-set over time. It should spread back out where the banks can make money, but in 2008, banks have got credit and demand problems combined with very tight margins.

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Seems like King & Spalding can’t open new offices fast enough. Atlanta’s biggest law firm has opened eight offices since 2007, including three in the Middle East—Dubai, Riyadh and, the latest, Abu Dhabi. One reason for the new outposts in the United Arab Emirates and in Saudi Arabia is the firm’s longstanding Islamic finance and investment practice.

Its new Middle Eastern offices notwithstanding, other King & Spalding offices also do Islamic finance work. The London office has cranked out work for Suez Energy International and Mitsui & Co. on a water and electricity project in Qatar; and for United International Bank of Bahrain on acquiring a controlling interest in a company that makes systems for filling and reconditioning liquefied propane gas cylinders.

Corporate partner Mark E. Thompson, an Atlanta native, works in the London office where he co-chairs the firm’s private-equity practice group. Thompson and his Atlanta-based colleague Raymond E. Baltz Jr. were lead counsel on another deal for a Middle Eastern client. King & Spalding advised Arcapita on the Bahrain private-equity fund’s acquisition of Scottish oil-well construction company Downhole Products Ltd. Arcapita acquired Downhole on behalf of its portfolio company, Varel International of Dallas. British law firm Herbert Smith advised Royal Bank of Scotland on its financing of the deal.

We spoke with Thompson about Islamic investments, the European market for private-equity deals and the work done by lawyers in King & Spalding’s London office.

Herbert Smith, RBS’s counsel on this deal, issued a legal alert that said in most U.K. leveraged buyouts involving Islamic finance firms, such as the Arcapita-Downhole deal, British banks have not provided Shari’ah-compliant financing. Instead, the banks used offshore vehicles for financing. Why do LBOs in the U.K. rarely use Shari’ah-compliant financing? Isn’t Shari’ah-compliant financing fairly common when U.S. firms are involved?

Direct Shari’ah-compliant financing is not commonly used in the U.K. for LBO transactions, although it is more frequently used in real estate transactions in the U.K. One reason is that U.K. financial-assistance laws prevent a company from using its own assets to finance the purchase of its shares, thus prohibiting this type of financing unless the target is a limited company (as opposed to a PLC), and what is called a “whitewash” is employed.

I wouldn’t say that Shari’ah-compliant LBO financing is common in the U.S. The demand for it is relatively limited and the structures are complicated.

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It’s a busy time for hospitality-industry development in Atlanta.

From the city’s downtown business district, to the law firm Center of the Universe in Midtown, to glitzy Buckhead, construction cranes seem to be bumping into each other all over town as they race to complete hotel projects.

Some is about making the old look new. The downtown Marriott Marquis [see picture, left], which opened in 1985, is getting a $138 million facelift. The Sheraton Colony Square’s transformation to the W Atlanta-Midtown was completed in March.

Others are hotel-condominium combinations, like Rosewood’s Mansion on Peachtree, and Twelve Hotel & Residences Centennial Park.

A storied name in luxury hotels, St. Regis, is building its first Atlanta outpost across the street from the Buckhead Whole Foods. Starwood can’t seem to place enough of its W brand in Atlanta—a Buckhead location will open in October, and another hotel overlooking the Downtown Connector from Ivan Allen Jr. Boulevard is slated for December.

The pipeline doesn’t seem to have been exhausted yet, either. The high-end hoteliers reported to be eyeballing Atlanta, many of whom are targeting Midtown, include Loews, Mandarin Oriental Hotel Group, Palomar and Ritz-Carlton. The Streets of Buckhead development may contain a Baccarat Hotels property. InterContinental Hotels Group, which includes the Crowne Plaza and Hotel Indigo brands, wants to open 20 new properties in Atlanta in three years.

We spoke with G. Brian Butler, a hospitality and real estate development partner at Morris, Manning & Martin, about why Atlanta is the queen bee of the hotel industry. Here is an edited transcript of our discussion.

What’s driving the boom times in Atlanta hotel development?

            What’s driving this is the industry’s recovery after the 2001 terrorist attacks. The market suffered for a couple of years, and people weren’t traveling, but it’s been coming back with an absolute bang. Demand had started to outstrip supply, so there are a lot of projects here and nationwide. Construction starts and rooms-in-the-pipeline numbers are at all-time highs.

Is the current economic environment more conducive to renovating existing hotels or building new hotels?

            It had been more towards renovating. The great run-up in construction costs has really made it hard to build new projects. It seems to me that they may be turning around a bit, and there is more new construction going on.  But building new products from the ground up seems to be cost-prohibitive, unless it’s a joint condominium-hotel project.

Where do you see the development going in the next 6 months to a year?

            What you’re seeing mostly is a focus on upscale projects in the city. But I’m also starting to see that, with the economic slowdown that’s here, or that’s coming, some of the focus is shifting back to the value [hotel] segment, as families and businesses cut back on spending.More...