Haney Long was the boss of a highly successful food commissary operation. Unfortunately for him and the 520 employees looking to him for their paychecks, the unit was a captive of the withering Shoney’s Inc.

One after another, Shoney’s restaurants were closed by a corporate headquarters desperate to staunch huge losses. What controllers on Elm Hill Pike saw as cash drains, Long viewed as the treasured customers of his meat-processing unit. He knew that the commissary, shouldering the high fixed costs normal for any food plant, could not go on forever with a disappearing customer base. The 11-year Shoney’s veteran was worried.

“There was only one way we could survive—and that was a buyout,” he says, two months after leading a management group in a leveraged transaction to acquire the operation. Renamed COI Foodservice, the company “is now shored up for everyone here.” Veteran senior managers with equity in the new company can stop fretting: “If they make the company successful, they won’t have to worry about retirement.”

Whether or not COI has the happy ending its chief executive expects depends on his team’s ability to perform with the high level of precision essential for companies that take on a lot of debt. Those challenges didn’t scare off Long, and they’re not scaring off a surprisingly large contingent of Nashville business people who themselves are embracing leverage at a time when it is relatively scarce.

From traditional leveraged buyout funds, to “roll up” companies, to orphaned businesses like COI, grabbing for debt seems to be a sign of the times. “The pendulum is swinging back today for leveraged transactions,” concurs Jack Harrington of local merchant bank Nelson Capital Corp. “The [mergers and acquisitions] market has dried up, and prospective acquirers of businesses no longer have their own inflated shares to use as currency, so we’re back to the expensive LBO money again.”

Leveraged buyout (LBO) money is dear for sellers because financial investors usually pay less for companies than do strategic buyers. Also, LBOs leave behind weighty interest payment obligations.

Comparatively speaking, buyouts engineered by free-spending CEOs using shares of stock trading at 35 times earnings are much cheaper. For the moment at least, that comparison is moot—many companies that needed cash to expand or to acquire competitors missed their opportunity 12 months ago when the new issues market collapsed.

As a result, Nashville and the rest of the nation are replete with companies languishing because they could not go public. These businesses, or “fallen angels” as area experts call them, are juicy targets for a renewed wave of debt-heavy takeovers.Before rushing to the banker’s window expecting to secure as much as $5 of debt for every $1 of equity used to finance a buyout, one should be aware that the game has changed in the past 18 months. A debt-equity ratio of three-to-one is more the norm today. Further, several trends are tilting against borrowers.

First, scrutinized by regulators and concerned about loan quality in a softening economy, banks began pulling in their horns a year ago.

“Continued conservatism” is how banker John Stein characterizes the industry’s lending posture today. “There is less of an appetite for highly leveraged transactions” on the part of banks. The Bank of America strategies executive notes that deals are still getting done, “but [the financing] is more expensive.”

With less leverage, buyers must put up more of their own capital, which drives down the percentage return on their investment. As a result, leveraged buyers aren’t paying up for acquisition candidates, causing buyout prices to fall. LBO funds are so cautious that of the extraordinary $63 billion raised by U.S. fund managers last year, only $41 billion was deployed. In turn, the resulting lower deal prices should carry with them the promise of improved return on investment in the future.

A second issue confronting Nashville borrowers is the prevalence of out-of-state bank loan officers, some say. “The originators may be here, but the underwriters for highly leveraged transactions are usually in specialized units in Charlotte, Atlanta or Dallas,” says Mike Collins, president of 2nd Generation Capital, the merchant bank that advised Long’s group in the COI deal.

For example, the buyout of office products wholesaler B.A. Pargh in 1999 was funded with debt from First American National Bank. This summer’s COI transaction, “because of its size and the weakness of the restaurant industry,” required out-of-state lenders led by Fleet Financial, Collins says.

Finally, the few large regional providers of much LBO financing here and elsewhere are consolidating into mammoths. Heller Financial, a Chicago-based lender very active in funding local health care transactions, said in late July that it will be bought by competitor GE Capital. One financier in the local buyout industry, speaking on the condition that he remain anonymous, summed up the thoughts expressed by others: “Heller historically has been a more lenient, aggressive lender than GE. I’m afraid Heller will become more conservative, and we’ll lose that niche in the market for $10 million of senior debt.”

Says Bass Berry & Sims partner Leigh Walton: “The big daddies of that business are getting even bigger, leaving relatively few choices for companies in Nashville looking to finance highly leveraged deals.”

A good advisor can make this task easier, COI’s Long suggests. 2nd Generation brought in three banks to finance the purchase of the commissary. The merchant bank provided another equally important service, he says.

“When you’re management and you’re doing an LBO, you’re negotiating with your boss,” Long warns. 2nd Generation negotiated on the buyout group’s behalf, serving as a buffer between the commissary’s management and Shoney’s Inc. executives.“We got a fair deal. We didn’t pay too much,” Long says. “But, because of all the risk involved, it wasn’t a great deal.”

Today, many perceive the health care industry as one area involving less risk. Leveraged hospital deals have been popping up all over this year as increases in federal health plan reimbursements put more money in providers’ coffers. “There’s a great deal of activity in mergers and acquisitions, including management buyouts,” Walton says of the health care sector.

Following the meltdown of the once hot telecommunications sector, hospital deals have come to be regarded as a safe haven for financial-services companies, says Bank of America’s Andrew Zimberg, who notes that many of his group’s financings require only local approval. Acute-care hospital chains are especially favored by participants in leveraged transactions who take comfort in the rising share prices of such local companies as HCA, LifePoint Hospitals and Community Health Systems.

Looking six months out, the mauled nursing home sector also could revive enough to begin a consolidation phase backed by debt financing, 2nd Generation’s Collins predicts. Overcapacity and cuts in government reimbursements put most of the nation’s largest long-term care chains in bankruptcy, a state from which they slowly have been emerging in recent weeks.

“The weak players have been squeezed out, reimbursements are more favorable, interest rates are lower, and their stock prices have gone up 30% to 40% in the past few months,” Collins says.

While not so enthusiastic now about the long-term care sector, Heller Healthcare Finance actively lends to companies that supply those companies, says Greg Browne, senior vice president of the Heller Financial unit in Chicago. Among his favored areas are companies that perform clinical trials or provide drug-marketing services for large pharmaceutical firms, those that help nursing home and other health care companies meet staffing shortages, and clinical laboratories.

Current market conditions dictate that the loans Heller makes to companies based on their level of cash flow are a maximum of two and a half times annual EBITDA, or earnings before interest, taxes and depreciation. Two years ago, loans equal to three and a half times EBITDA were the norm.

More interested in loans backed by assets and in a niche about as far from health care as possible, Andrew W. Byrd & Co. plies its traditional small company LBO craft unaffected by tightness among traditional cash-flow lenders. With a portfolio of four companies in the Tennessee Valley Ventures L.P. partnership it manages, the downtown firm is prospering by sticking with its focus on old-economy businesses.

Such companies—including electric-fired commercial boilermaker Precision Boilers in Morristown, Tenn. and the Alabama-based chicken tenders processor, Albertville Quality Foods—typically are asset rich. While banks are decidedly less aggressive now about extending loans based on a borrower’s cash flow, they remain eager to make asset-backed loans. “The tightening in the cash flow loan market has not harmed our ability to finance transactions,” Andrew Byrd says.

Since its formation in 1994, Andrew W. Byrd & Co. has stayed within tightly defined parameters: Companies that can be bought for $3 million to $40 million, priced at four to six times cash flow, with very reliable cash flow and a management team that can be elevated from within to replace the sellers.

Since LBO funds don’t look at deals so small, returns in this sector of LBO investing can be unusually large, Byrd says.

A bigger fish in the LBO pond is Kohlberg & Co., whose local representative is scouring the region for buyout prospects with annual sales of $100 million to $700 million. Bill Andrews has helped bring his New York-based company six or seven industrial buyouts in this region over the years, including Micro Craft in Tullahoma, Holley Performance Products in Bowling Green, Ky., and Rykoff-Sexton Manufacturing. He’s hunting for others.

With some of the $600 million Kohlberg recently raised for a new fund, Andrews, who also serves as chairman of Corrections Corporation of America, expects to invest in depressed publicly traded companies. Kohlberg has led leveraged buyouts of two public companies in the past few months and additional “going-private transactions might be better for shareholders than remaining as public corporations,” he says.

However, banks not only are lending less aggressively in such deals, they are playing hardball with other participants in leveraged transactions. “Before, if a company ran into loan covenant problems, the banks would work with you,” he says. “Today, they’re more inclined to try to force companies to restructure their debt,” cramming down the holders of subordinated debt so that the bank’s senior position is more secure.

While not finding itself in exactly that position, Prime Office Products, a two-year-old Nashville company, has endured the effects of banks’ tighter lending policies. Last fall, the commercial office supply company suspended its “roll up” strategy after Bank of America tightened the terms of its credit agreement. Similarly, Frontline Group, the corporate training firm led by Marguerite Sallee, has seen its expansion plans checked by difficult lending conditions.

At least for Prime, the cutback in credit might have kept it from buying assets just as they were about to dip in value.

“Frankly, with the downturn in the economy, we haven’t been very aggressive about trying to put together a new credit facility,” says Prime’s president, Bob Fisher. “Sales at other people’s businesses have been slipping anywhere from five to 15%, so we’ve been waiting for things to bottom, which feels like it’s happening now.”

Perhaps as a sign that the lending ice is thawing, Prime just signed a letter of intent with a company it expects to acquire later this month. Fisher is eager for Prime to ramp back up its expansion strategy. “Starting in September, we expect to get back at it.”