During a recent NHBR “Down to Business” podcast, we asked Joe Carelli, president of New Hampshire and Vermont for Citizens bank, about the effect of interest rates on business activity in New Hampshire. The following was edited for space and clarity.

Q. How is rise in interest rates affecting merger and acquisition activity in the state?

A. Interest rates over the last 16 months have increased 500 or so basis points. If you’re a company that’s looking to put debt on your balance sheet, money has become increasingly expensive. When we look at mergers and acquisition opportunities, there’s typically several different components that that makes those deals come together. There’s conventional bank debt financing. And there is some mezzanine debt financing.

Typically, if there’s an additional layer of debt that needs to be layered in to get the transaction funded, that debt comes in at a level that’s a little bit higher than bank debt. As bank debt has increased with the Fed interest rate increases, so has that secondary level of more expensive debt burden.

Quite honestly, the people providing the capital are expecting stronger returns on their capital. Their debt is becoming more expensive, which means that they’re looking for potentially larger ownership percentages, which is causing transactions to be more expensive across the board. So yes, the mergers and acquisition market has softened considering that interest rates have increase.

Q. Do you see the pressure for banks to hold on to more capital with pressure from the feds over the next several years affecting this activity?

A. There’s no doubt that capital requirements (for banks) are going to increase. We haven’t yet seen the full the full playlist of what it might look like. But the feds are looking at the cost of capital. They’re looking really closely at loan portfolios. They’re looking at stress testing and analysis. There’s no doubt that when the summation of all of those exercises are complete, there’s potentially going to be an increased cost of capital.

Plus layer on top of that the recent bank failures that put a dent in the FDIC insurance fund. They’re going to be looking at the banks to refund that fund. And that’s really going to play out in capital costs. There are many factors that are going to affect how a bank funds its capital reserve requirements.