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Middle Market: Private Debt Funds Account for Half of European Leveraged Loans

In the U.K., private debt funds racked up a market share of almost 50% of mid-market term loans (those under €300 million in size) in the first half of 2018, according to advisory firm AlixPartners’ bi-annual mid-market debt report. When stretch senior deals were combined with unitranche loans, private debt funds provided 46% of loans in the U.K., the report reveals.

Sources credited the continued increase in debt funds’ market share to the maturity of the U.K. market, as well as the density and openness of sponsors operating there to non-bank lenders.

The total deal count for European debt funds in the first six months of 2018 hit 181, led by Ares (21 deals) and Tikehau (16 deals). That figure was down on the 203 deals racked up in the second half of 2017. On an overall European basis, unitranche deals increased their market share to 31% of all deals recorded, up from 27% in 2017, said the report. That proportion rises to 35% when super-senior and junior facilities are excluded.

Unlike the large-cap syndicated market, which has been dominated by M&A this year, the drivers for mid-market deals have remained extremely stable, according to AlixPartners. The proportion of leveraged buyouts (45%) and refinancings (24%) were the same in 1H18 as they were for full-year 2017. Add-on acquisitions increased marginally from 22% in 2017 to 25%, while dividend recaps fell to 6% in the first half of the year, from 8% in 2017. — Rachel McGovern

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Capital Dynamics Taps Credit Suisse Vets for Foray into Private Credit Business

Capital Dynamics last month launched a dedicated private credit asset management business, tapping two Credit Suisse veterans to head up the group. Jens Ernberg and Thomas Hall will co-lead the new private credit business, based out of the New York office.

Ernberg and Hall each bring close to 20 years of industry experience in syndicated and private credit. Prior to joining Capital Dynamics, they worked together for 10 years at Credit Suisse, where they started the middle market direct lending business. At Credit Suisse, they originated over $2 billion in private debt across more than 50 transactions, according to Capital Dynamics.

Now leading Capital Dynamics’ Private Credit Asset Management business, they plan to originate and invest in private debt transactions for middle market companies owned or controlled by private equity sponsors. Capital Dynamics has relationships with over 500 sponsors.

Specifically, Ernberg and Hall intend to “source senior secured loans, focusing on first-lien, unitranche, and second-lien facilities,” according to Hall. While the private credit business will “have the flexibility to consider mezzanine and equity co-investment opportunities, the focus is on senior secured floating rate debt.” They are targeting “lower middle market companies with EBITDA ranging from $7.5 million, on the lower end, to $50 million.”

The target fund size will be around $500 million, according to sources.

The lower middle market space has been extremely competitive in recent years due to record levels of capital raised for the asset class, resulting in increased amounts of capital chasing relatively few deals. In today’s issuer friendly market, covenant-lite structures prevalent in the broadly syndicated and upper middle markets have been making their way into the traditional and lower middle markets, posing an interesting situation for the direct lending space.

“Cov-lite structures have not gotten into transactions for companies with EBITDA in the teens,” Ernberg said. “Around the $25 million EBITDA business—you are seeing cov-lite structures go there, even though a direct lender may win the transaction versus an arranger agent that is seeking to syndicate the facility. … Most lenders seem to be holding a hard line on meaningful covenants for businesses under the $25 million in EBITDA range.”

Despite the competitive industry, Ernberg and Hall posit that what differentiates their private credit business is “the close relationships with private equity general partners and the scale of the platform with $28 billion of assets under management or advisement.” — Shivan Bhavnani

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Leverage on US LBOs Hits Highest Level Since Financial Crisis

lbo leverage

Leverage on large U.S. LBOs crept to 6:1 in 2017’s third quarter, the highest it’s been since the financial market meltdown of 2007, according to LCD.

That 6x number is of particular interest to the global leveraged finance market.

Federal regulators, in an effort to shore up the financial markets after the crisis, in 2013 issued guidance saying that loans with a debt/EBITA ratio in excess of 6x “raises concerns.” This prompted traditional corporate lenders – banks regulated by the Fed – to proceed cautiously regarding highly leveraged transactions. This cautiousness, in turn, has helped open up the direct lending/private credit market, where non-regulated asset managers increasingly are stepping in to provide often-riskier credits to leveraged borrowers.

A few items of note here: While non-regulated lenders continue to make inroads into the leveraged lending space, most of the deals underlying the above chart were led by traditional banks, demonstrating that those entities continue to drive this market.

Also, while overall leverage has indeed crept higher of late, other credit metrics point to a less ‘risky’ market in 2017 than in 2007, so 6.x leverage does not necessarily mean that risk is approaching unmanageable levels. (As well, a number of loan market participants continue to call the 6x target by the Fed ‘arbitrary’.)

LBOs, of course, are especially attractive to loan arrangers and investors as they generally feature higher fees and interest rates than non-M&A credits, such as those backing refinancings or general corporate purposes. The higher-yielding M&A deals comprised a relatively large share of leveraged loan activity in 2017’s third quarter, according to LCD. This is a marked change from the first half of the year, when repricing activity and other ‘opportunistic issuance’ dominated the U.S. loan space.

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Late to party, Bain targets global middle market strategy for BDC

While no stranger to lending to middle market companies, Bain Capital is a latecomer to the BDC party. Other asset investment firms of its size embraced the structure years ago.

A combination of demand from institutional investors and lessons learned from the lenders that came and went during the credit crisis motivated the wait.

“We haven’t gone for explosive growth,” said Michael Ewald.

Calls for a BDC’s advantageous structure led to the SEC filing of the registration statement for Bain Capital Specialty Finance on Oct. 6. The BDC will invest in middle market companies generating $10 million–150 million in annual earnings, with ones that generate $20–75 million in EBITDA the primary target.

Ones smaller than those, generating $10–20 million in earnings, generally have very health relationships with regional banks, so lending to them is more competitive.

Bain plans to differentiate themselves from the crowded playing field of BDCs that lend to middle market companies by investment choices made for the 30% of assets in non-qualifying investments. Here, Bain aims to target European and Australian companies.

The credit originations team under Ewald reflects this: staff in Melbourne is increasing to four from three, seven people are based in London, and the rest are in New York, Boston, and Chicago.

The previous name of the entity is Sankaty Capital Corp, the filing showed. The BDC will be externally managed by Bain professionals through BCSF Advisors. The BDC’s board consists of David Fubini, Thomas Hough, and Jay Margolis. Investment decisions are made by the committee that governs other Bain Funds, and consists of Jonathan Lavine, Tim Barns, Stuart Davies, Jonathan DeSimone, Alon Avner, Michael Ewald, Christopher Linneman, and Jeff Robinson.

Investor capital at Bain has previously had exposure to the middle market lending asset class through other funds, including a dedicated $400 million direct lending fund raised at the start of 2015. In addition, Bain is currently investing from a $1.5 billion fund targeting junior debt investments at middle market companies, with another $3.5–4 billion targeting senior debt of middle market companies through others types of funds and managed accounts.

The BDC has been investing for about three weeks, and is expected to ramp up fully over one year. Excluding leverage, the size is $546 million. The private BDC has a 3-1/2 year investment period, after which it will be wound down, unless it is listed publicly before then.

Many BDCs in recent years have struggled with shares trading below net asset value, marring fundraising efforts through share sales. Before then, the BDC would need to be fully invested, and grow more, with at least $750 million in equity.

Per Ewald, “There’s potential to take it public, but we’ll figure that out when the time’s appropriate. There haven’t been a lot of BDC IPOs lately, so that might be the bigger news story.” — Abby Latour

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Capitala Closes $500M Private Credit Fund for Middle Market Loans

Capitala Group, which lends to middle market companies, announced today it closed a new private credit fund, the $500 million Capitala Private Credit Fund V.

The private credit fund, which closed last month, is Capitala’s largest since the company listed its BDC in September 2013. The fund has no SBIC component since Capitala has already reached the $350 million limit for borrowing across a family of funds.

“We expect to be deploying the fund promptly,” Joseph Alala, Chairman and CEO of Capitala Finance, told LCD News. “The opportunities are there, and deals are still getting done. We have the opportunity to invest now, thanks to the fund.”

The fund will target the same investments as the BDC, traditional lower middle market and middle market companies. The BDC will have the opportunity for co-investment with the private fund.

The investment committee has been expanded for Capitala Private Credit Fund V. In addition to Alala, Jack McGlinn, and Hunt Broyhill, who make investment decisions for the BDC, the private fund’s investment committee includes Chris Norton, Randall Fontes, and Adam Richeson.

Alala said Capitala Group is actively seeking to expand its investment team, adding staff in Charlotte, N.C., and the Northeastern U.S..

The news of Capitala Private Credit Fund V comes on the heels of an announcement late last month that Capitala Finance exited four investments totaling $57.1 million.

These investments included $18.4 million of subordinated debt in Merlin International, an $8 million subordinated debt and a $10.6 million equity investment in MTI Holdings, a $6.4 million subordinated debt and $2.8 million equity investment in STX Healthcare Management Services, and a full repayment of a $10.9 million senior and subordinated debt investment toSparus Holdings.

Including the exit of Sparus, Capitala’s exposure to the troubled energy sector declined to 3%, on a fair value basis, from 9% at year-end 2015.

Alala added that there had been no new development to the situation at Sierra Hamilton, an oil and gas engineering and consulting services company. As of June 30, a $15 million 12.25% senior secured term loan due 2018 was booked at $7.5 million at fair value, compared to $10.1 million as of Dec. 31. The investment consists of a first-lien loan behind a working capital revolver.

On an Aug. 10 earnings call, in response to an analyst’s question, management said the borrower was current on interest payments.

Charlotte, N.C.–based Capitala Finance targets debt and equity investments in middle market companies generating annual EBITDA of $5–30 million. The company focuses on mezzanine and subordinated deals, but also invests in first-lien, second-lien, and unitranche debt. It trades on the Nasdaq under the ticker CPTA. Capitala Investment Advisors is its external investment adviser. — Abby Latour

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Beechbrook Capital Raises €100M for Direct Lending Fund

Private debt manager Beechbrook Capital has reached a first close of more than €100 million on its third private debt fund. Private Debt III is targeting €200–250 million in commitments from investors with a hard-cap of €300 million, said managing partner Paul Shea.

The latest vehicle in the series maintains the same investment strategy and will provide private debt, including mezzanine and unitranche, to lower mid-market buyouts in northern Europe.

beechbrookLimited partners in the first close include the European Investment Fund and British Business Bank’s investment arm as well as other European institutional investors. Beechbrook expects to hold a second close at the end of 2016 before the final close, which is now slated for 2017, to allow allocations from next year to come in.

The new fund is an English limited partnership, said Shea, adding that there will be at least two years after the U.K. triggers its departure from the EU before access to the single market becomes an issue. He said that the question of passport access to the EU single market wasn’t flagged as a major issue by investors ahead of the close.

Of more concern to investors, Shea said, was the short-term impact of Brexit on the U.K.’s economic outlook. The lower mid-market, Beechbrook’s specialty, is relatively insulated from the fallout focusing more on micro issues. Potential falls in asset prices could limit appetite for mezzanine debt, but that is balanced out by lower availability of senior debt and potential for improved returns from Beechbrook’s equity kickers, he added.

Beechbrook’s private debt fund focuses on European private equity–sponsored businesses with turnover between €10–100 million. Its loans generally range from €5–15 million per transaction and support acquisitions, shareholder re-alignments, and growth plans.

The firm has a separate UK sponsorless fund which reached a first close of more than £100 million in January.

One of the firm’s most recent deals was from the sponsorless fund, an £8.6 million loan to 4Most to support a reorganisation of shareholders and the business’ growth plan. 4Most provides regulatory and credit-risk analytics consultancy to banks, credit card providers, and other businesses with consumer credit exposure.

In total, Beechbrook has executed 36 transactions across the European lower mid-market and has fully exited 10 of those deals. — Rachel McGovern

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Golub Capital backs Roark Merger of PetValue/Pet Supermarket with Hefty Unitranche Loan

Golub Capital was sole bookrunner and joint lead arranger on a $605 million unitranche loan that financed the merger of Pet Valu and Pet Supermarket, which are both portfolio companies of Roark Capital. Additional details of the financing were not available.

Golub is administrative agent on the loan. It is largest agented loan in the firm’s history.

The transaction combines longtime Roark portfolio company Pet Valu, acquired in 2009, with Pet Supermarket, which the private equity firm bought last year. Golub also provided debt financing for the latter acquisition. The combined business, called Pet Retail Brands, will have 930 stores in the U.S. and Canada and will generate around $1 billion in system-wide sales, according to the sponsor. Pet Valu and Pet Supermarket will continue to operate as independent brands.

Pet Retail Brands is a specialty retailer of premium pet food, supplies and services. The company will remain headquartered in Markham, Ontario, while Pet Supermarket operations will continue to be based in Sunrise, Fla. — Jon Hemingway

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.