DiversiTech receives $153M of loans, led by BMO Harris Bank

BMO Harris Bank was administrative agent on $153 million in first-lien credit facilities backing DiversiTech Corporation.

Middle-market private equity firm Jordan Company this month unveiled its acquisition of DiversiTech.

DiversiTech, based in Duluth, Ga., sells engineered components for heating, ventilation, air conditioning, and refrigeration systems. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.


BlueArc Capital’s buyout of Brunswick Bowling financed by Gladstone

Gladstone Investment Corporation provided debt for a buyout of Brunswick Bowling Products by BlueArc Capital Management.

Gladstone Investment provided equity and secured debt. Capitala Finance was also part of the transaction.

Brunswick Corp. was the seller. Last year, Brunswick completed a sale of its retail bowling centers to Bowlmor AMF. Proceeds from both sales are expected to range from $270-290 million, depending on tax and liabilities.

BlueArc Capital Management, based in Atlanta, is a private investment firm.

Brunswick Corp., based in Lake Forest, Ill., targets growth investments and acquisitions in the marine and fitness segments. Brands include Mercury and Mariner outboard engines; Life Fitness and Hammer Strength fitness equipment; and Brunswick billiards tables and table tennis.

Gladstone Investment Corporation, a BDC that trades on Nasdaq under the symbol GAIN, invests in debt and equity of small- and mid-size businesses. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more



Golub hires Cushman from GE Antares for middle market origination

Golub Capital has hired Chip Cushman from GE Antares to originate middle market loans.

Cushman will cover the New York metro and D.C. metro areas and be based in New York. He joins as a managing director.

At GE Antares, Cushman was responsible for developing relationships with private equity firms and originating new loans.

At the same time, Golub Capital announced that Matt Fulk and Craig Palmer would assume new roles in origination, from underwriting.

“Stepping into their new business development roles will further support Golub Capital’s intention to increase its client base,” a May 15 statement from Golub said.

GE announced in April it would divest GE Capital, including its $16 billion sponsor finance business. GE Antares specializes in middle market lending to private-equity backed transactions. – Abby Latour


Gehl Foods nets $161.5M from SSLP for Wind Point buyout

GE Capital and Ares Capital were joint lead arrangers and joint bookrunners on a $161.5 million senior secured term loan that closed in the first quarter to finance the acquisition of privately held Gehl Foods by Wind Point Partners. The loan was provided via the Senior Secured Loan Program (SSLP).

As of March 31, the SSLP’s portfolio holdings listed a loan for Gehl due March 2021, with an interest rate of 7.5%, according to the latest 10-Q filing for Ares Capital.

Gehl Foods, based in Germantown, Wis., is a maker of ready-to-serve, real dairy products. The company uses an advanced aseptic process to eliminate microorganisms that cause dairy foods to spoil and at the same time locks in freshness and taste. Gehl recorded sales of nearly $250 million in 2014, according to the company. – Jon Hemingway


High grade bond volume exceeds $50B this week, for third time ever

After one of the biggest two-session outbursts of supply on record Tuesday and Wednesday, seven more issuers piled into the primary market on Thursday, including deals for Boston Scientific ($1.85 billion), Anglo American Capital ($1.5 billion), Chevron Phillips Chemical ($1.4 billion), EnLink Midstream Partners ($900 million), Bank of America ($600 million of “green” bonds), Puget Energy($400 million), and Weingarten Realty Investors ($250 million).

This week’s torrent of bond offerings backing aggressive corporate fiscal policies resulted in a rare weekly issuance total north of $50 billion, against the backdrop of rapidly increasing absolute costs, LCD data show. Indeed, that $50-billion threshold has only been crossed twice before, including when $60 billion was printed over the week ended Sept. 13, 2013 – largely on the strength of a record-smashing, $49 billion deal for Verizon Communications – and $51.7 billion was placed over the first week of March this year.

This week’s volume also pushed the 2015 issuance total to roughly $463 billion, or 23% ahead of the 2014 pace, and 26% ahead of the total over the same period in 2013.

(Note: LCD totals exclude sovereign, quasi-sovereign, supranational, preferred and hybrid-structure, and remarked deals.)

Corporate treasurers are clearly indicating a sense of urgency to lock in funds, as underlying rates spiral higher, including through shocking bouts of intraday volatility, as was displayed in trades in the 10-year U.S. Treasury benchmark on Thursday morning.

Apple’s $8 billion deal this week perhaps most dramatically underscored the shift higher in absolute costs for borrowers this year. Coupons were printed on May 6 at 2% for five-year notes at T+45, 3.2% for 10-year notes at T+100, and 4.375% for 30-year bonds at T+140, or 45-92.5 bps more than since it placed, in early February this year, 1.55% five-year notes at T+42, 2.5% 10-year notes at T+85, and 3.45% 30-year bonds at T+125, as part of a $6.5 billion offering.

Pitching long-dated debt exposure to investors has been complicated after the average yield across the long-dated industrial component of the Barclays U.S. high-grade index climbed to a 12-month high of 4.76% as of Wednesday, reflecting a move up of half a percentage point in less than three weeks. The category posted a sharp total-turn loss of 3% for the month-to-date through Wednesday, and 5% over the previous three months.

But curve-spanning deals continue to mount, as borrowers scramble to lock in funds for M&A and direct shareholder returns. Including today’s deals for Boston Scientific and EnLink Midstream Partners, M&A-driven deals accounted for nearly $32 billion of issuance volume, or 57% of this week’s issuance total through Thursday.

Meantime, Apple this week placed another blockbuster debt backing its recent material increase in buybacks and dividends – following big deals last week for Oracle and Amgen for the same purposes – while Chevron Phillips Chemical and Puget Energy locked in funds in part for special distributions. – John Atkins


American Capital says it now plans to form one new BDC, not two

American Capital has revised a plan to split the company into three parts, saying it will now form only one new BDC, instead of two.

The new BDC, known as American Capital Income, will have $4 billion of equity capital at close and will comprise most of American Capital’s existing investment assets. The earlier plan, announced in November, was for two BDCs, one allocated $3 billion of equity and the other $1 billion.

“By concentrating capital in one larger BDC and utilizing our established Sponsor Finance business, American Capital Income will be able to lead and syndicate upper middle market unitranche and second lien sponsor finance transactions, underwriting up to $300 million, while generally holding up to $150 million. This should allow American Capital Income to originate substantially more sponsor finance volume than American Capital has in its past, while enhancing credit by lending to larger and more established businesses,” American Capital said in a statement.

Last year, American Capital originated $689 million in sponsor-finance deals.

American Capital and other lenders to private equity-backed companies are positioning themselves to take market share from traditional market leader, GE Capital after General Electric announced in April that it plans to divest GE Capital, including its $16 billion sponsor finance business. Uncertainty over the GE Capital sale is expected to open the market to competitors.

The spin-off of American Capital Income will be through a tax-free dividend to shareholders.

American Capital shareholders need to approve the transaction, including American Capital’s election to no longer be regulated as a BDC. American Capital will continue as a publicly traded asset management business. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.



Investors eye BDC portfolios for signs of more pain from energy sector

On the eve of first-quarter earnings, BDC investors are anxious to see whether the energy sector will inflict more pain on loan portfolios.

An analysis of the portfolios of 45 BDCs tracked by LCD shows that 31 energy-related companies with outstanding debt were in distressed territory at the end of 2014, in this case valued at 80 or less, which is a widely used definition of distressed debt. Of these, the average weighted fair value at year-end was 64 cents on the dollar.

Prior to last year’s oil price declines, there were just 10 energy-related companies with debt in distressed territory, at a weighted average of 38.5, an analysis by LCD of public filings of the BDCs showed.

First-quarter results for BDCs began to trickle in last week, and many more are expected this week. While oil prices have yet to recover fully, prices are off lows, and the outlook is relatively stable for the short term.

“While the energy exposure is still a concern, we are not expecting an influx of energy non-accruals in the quarter,” KBW analyst Troy Ward said in an April 27 research note. But if oil remains depressed, KBW expects to see an increase in loans booked as non-accrual in the second half of 2015.

Of all the distressed debt within BDC portfolios, energy accounts for about a quarter of the total. Distressed energy debt totaled $500 million of principal within BDC portfolios tracked by LCD, counted across various tranches of debt, at the end of the fourth quarter. That’s 23% of $2.2 billion by principal amount in total distressed assets.

Similarly, energy is the most concentrated sector of distressed assets across other measures of distress in the credit markets.

For example, the Oil & Gas sector accounted for 37.2% of the loans in the distressed ratio of the S&P/LSTA Loan Index. The distressed ratio tracks the percent of performing Index loans trading at a yield of L+1,000 or higher. Oil & Gas-related loans account for 4.7% of the overall Index.

Of all loans in the Index, Oil & Gas-related loans account for 4.7% as of April. Despite two defaults that totaled $1.7 billion –Walter Energy and Sabine Oil & Gas’ second-lien loan – the lagging default rate of the S&P/LSTA Loan Index by principal amount dropped to 1.26% in April, a one-year low, from 3.79% in March.

In another measure of distress in credit markets, S&P Capital IQ’s Distressed Debt Monitor, the ratio of U.S. distressed debt was steady, at 11.5% in April. Again, distressed credits are defined here as speculative-grade issues with option-adjusted composite spreads in excess of 1,000 bps over Treasuries.

The Oil & Gas sector had the highest proportion of debt trading at distressed levels, at 38%, and the highest share of distressed issues by count, at 72, and one of the largest by distressed amount, at 29.9%, as of April 15, according to Distressed Debt Monitor, which is published by S&P Capital IQ.

In a sign of stabilization in the sector, the Oil & Gas sector experienced the largest decline in the proportion of distressed issues, falling 3.9% in April, month over month, the Distressed Debt Monitor showed.

Within the BDC portfolios, energy debt accounts for 5.8% of all debt investments, or $60.7 billion (in outstanding principal).

“It’s not that things have dramatically improved, but the volatility has subsided for now. It’s reasonable to think that they are at a floor level now,” said Merrill Ross, an equity analyst at Wunderlich Securities.

Energy sector allocations vary between BDCs. Some have no exposure to the sector. At year end, CM Finance, PennantPark, Gladstone, Main Street, Apollo Investment, Blackrock Capital, TPG Specialty, and White Horse Finance had 10% or more exposure in oil-related energy, including equity investments, according to KBW research. The weighted-average fair value for energy debt across these eight lenders ranges between 86.5 and 97.9.

BDC Energy 4Q story May 2015

Fair values vary across portfolios and can be difficult to assess among small private companies. Sometimes differences across the same investment can be attributed to different cost-basis levels for each provider. The timing of changes in fair value also can vary.

Below are some examples of distressed Oil & Gas holdings as of Dec. 31, 2014.The implied bids are based on fair value to cost:

The 7.5% second-lien debt due Nov. 1, 2018 for Bennu Oil & Gas is marked at 83% of cost at Sierra Income Fund, whereas CM Finance and PennantPark mark it at 76 and 75, respectively.

The 8.75% senior secured loan due April 15, 2020 for exploration-and-production company Caelus Energy is marked at 93 at CM Finance, and 91 by WhiteHorse Finance.

The 12% mezzanine financing due Nov. 15, 2019 for New Gulf Resources was marked at 56 by Blackrock Capital Investment at the end of 2014, while PennantPark Investment marks the debt at 52. However, Blackrock Capital on April 30 reported first-quarter earnings, showing the 12% mezzanine loan now marked at 67.

A $7.5 million, 9.5% subordinated loan due 2020 to Comstock Resources was marked at $5.1 million at year-end by FS Investment, or 70 to cost. Comstock Resources, based in Frisco, Texas, is an oil-and-gas exploration-and-production company that trades on NYSE under the ticker symbol CRK.

Other distressed debt holdings in energy within BDC portfolios are of larger companies whose financial woes are well publicized.

Apollo Investment Corp. holds Venoco 8.875% notes due 2019 and had them marked at 55 as of Dec. 31, 2014. In early April, Standard & Poor’s cut the notes to D, from CCC+, and the corporate rating was lowered to SD, after the company announced the results of a below-par debt swap.

On April 22, Standard & Poor’s raised Venoco’s corporate rating to CCC+, and the senior unsecured notes were raised to CCC-, after the release of 2014 earnings and taking into account the significant loss of principal on the unsecured notes after the exchange.

In another closely tracked credit, some distressed energy sector debt in BDC portfolios is that of Sabine Oil & Gas, which defaulted on debt last month after skipping a $15 million interest payment on its second-lien term loan. Corporate Capital Trust holds 8.75% Sabine debt due 2018 and marked it at 78 in its 2014 fourth-quarter portfolio.

FS Investment (FSIC) showed a $6.3 million holding in SandRidge Energy subordinated debt due 2020, marked at 81. SandRidge Energy unsecured notes are trading in the high 60s, according to sources and trade data.

One distressed energy credit, Halcón Resources, will better weather the slump in oil prices due to the sale of $700 million of 8.625% second-lien notes due 2020 on April 21. The exploration-and-production company operating in North Dakota and eastern Texas intends to use proceeds to repay revolver debt and to fund general corporate purposes.

Main Street Capital has a holding of existing Halcón Resources bonds, the 9.75% unsecured debt due 2020, marked at 82, and HMS Income fund debt has a holding of the same debt marked at 87 (When marked to principal amount, the debt is marked at 75 at both BDCs.). – Kelly Thompson/Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.

Follow Kelly Thompson on @MMKTDoyenne.


3 months later, Presidio eyes repricing of $600M leveraged loan backing Apollo LBO

Credit Suisse is holding a lender call tomorrow at 2:00 p.m. EDT to launch a repricing of Presidio’s first-lien leveraged loan that backed the January LBO of the company by Apollo Management.

The issuer will make a $25 million voluntary prepayment against the $600 million term loan due February 2022 as it seeks to lower pricing to L+425, with a 1% LIBOR floor. The repricing, from L+525, with a 1% floor, will trigger the 101 soft call premium. Of note, the original deal was issued at 97.

The repriced loan is offered at par and includes six months of 101 soft call protection. Commitments are due on Wednesday May 13.

The issuer is rated B/B2. The loan is rated B/B1, with a 3 recovery rating.

Credit Suisse, Barclays, Citigroup, RBC Capital Markets, and Goldman Sachs arranged the existing loan, which cleared wide of talk among other investor-friendly revisions. The issuer also placed $250 million of 144A senior notes at a discount to the 10.25% coupon, for a yield of 11.973%–  $150 million short of the targeted $400 million. The sponsor took down the remaining paper, at what was believed to be a steep discount to par. – Chris Donnelly


FSFR funds $87M of investments with Glick JV, sees low-teens return

Fifth Street Senior Floating Rate Corp., a BDC that trades on Nasdaq under the ticker symbol FSFR, said that its joint venture with affiliates of the Glick family had funded $86.6 million of investments in a portfolio of senior secured loans of middle-market companies of an expected $300 million total.

Fifth Street’s origination platform sourced the asset portfolio. It is funded by the JV’s $200 million revolver with Credit Suisse and equity of $60 million, which is the required minimum for the RC.

“FSFR believes that funding this initial portfolio of assets should generate a low-teens return on its investment, which is higher than the return on FSFR’s current portfolio. FSFR expects to continue funding FSFR Glick JV to its target size of $300 million over the next few quarters,” a statement on April 29 said.

FSFR and GF Funding have committed to $100 million of subordinated notes and equity for the new joint venture, FSFR Glick JV, which was unveiled in November. FSFR is providing $87.5 million and GF Funding is investing $12.5 million.

The Glick family office manages a wide range of asset classes, including a stake of more than 25% in Songbird Estates, the holding company of Canary Wharf.

The structure of FSFR Glick JV is similar to a joint venture between Fifth Street Finance Corp., which trades under the ticker symbol FSC, and a subsidiary of Kemper Corp.

At year-end, FSFR’s portfolio at fair value totaled $595.9 million invested in 57 companies.

FSFR is advised by Fifth Street Asset Management, which listed shares on Nasdaq last month under the ticker symbol FSAM. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.


PennantPark, a BDC, to buy assets of struggling rival lender MCG Capital

PennantPark Floating Rate Capital, a business-development company, announced plans today to expand its portfolio through the acquisition of MCG Capital, a struggling lender to middle-market companies that had taken steps to wind down its portfolio.

PennantPark Floating Rate Capital, which trades on the NASDAQ under the symbol PFLT, will acquire MCGC in a $175 million cash-and-stock transaction, or $4.75 per MCGC share. MCGC stockholders will receive $4.521 in PFLT shares and $0.226 per share in cash from PennantPark Investment Advisers, and possibly an additional $0.25 depending on PFLT’s NAV over a 10-day period.

MCGC shares jumped 10% today, to $4.51, from $4.10 at yesterday’s close on the Nasdaq.

Boards of both companies approved the transaction. Stockholders of both companies need to agree to the transaction. The deal is expected to close in the third quarter.

The equity base of the combined company is expected to total $376 million.

“A balance sheet of this size will allow the combined company to be a more important provider of capital to middle-market sponsors and corporate borrowers,” a joint statement today said.

“PFLT expects, over time, to deploy most of MCGC’s cash into an investment portfolio consistent with that of PFLT’s existing loan portfolio.”

The deal is a boon to MCGC shareholders. In October, MCG Capital announced it was winding down its portfolio and buying back its stock with asset-sale proceeds, citing a credit-cycle peak. In February, MCG Capital announced it was exploring a potential sale.

“Our stockholders should benefit through resumed receipt of dividends and ownership in a company with a strong balance sheet and proven track record,” said Richard Neu, Board Chairman of MCG Capital.

PennantPark Floating Rate Capital shares traded higher after the announcement, touching $14.23, but have since erased gains to trade steady, at $14.15 on the Nasdaq, which was overall lower. Investments in middle-market companies can be difficult to acquire, except over an extended period. Buying an entire portfolio can be an attractive way to acquire a significant amount of assets at once in the competitive marketplace. Investors of debt in middle-market companies usually find economies of scale from larger holdings.

Another huge portfolio of middle-market assets is currently on the auction block. GE unveiled plans this month to sell GE Capital, the dominant player in middle-market lending. Leveraged Commentary & Data defines the business as lending to companies that generate EBITDA of $50 million or less, or $350 million or less by debt size, although definitions vary among lenders.

MCG Capital, formerly known as MCG Credit Corp., was a specialty lender focused on telecoms, communications, publishing, and media companies that was spun off from Signet Bank. Over the past decade, the company managed to shed some underperforming assets and diversify, but the company remained saddled with legacy assets from poorly performing traditional businesses.

PennantPark Floating Rate Capital is an externally managed business-development company, or BDC. The lender targets 65% of its portfolio for investments in senior secured loans and 35% in second-lien, high yield, mezzanine, distressed debt, and equity of below-investment-grade U.S. middle-market companies. The portfolio totaled $354 million at year-end on a fair-value basis.

PennantPark Investment Advisers receives fees from PennantPark Floating Rate Capital for investment advising, some of which are linked to performance of PFLT.

In December, MCG Capital announced the results of a Dutch auction, saying it bought 4.86 million shares for $3.75 each, representing 11.2% of shares outstanding, for a total of $18.2 million. MCG also reinstated an open market share repurchase program. In total, MCG Capital bought more than 31 million shares in 2014, totaling more than $117 million.

In April, MCG Capital completed a sale of Pharmalogic, marking the exit of all of the lender’s control investments. MCG Capital provided a $17.5 million, 8.5% first-lien loan due 2017, and a revolver, to facilitate the sale. Pharmalogic is a nuclear compounding pharmacy for regional hospitals and imaging centers.

MCG Capital had also struggled with a few poor, but isolated, bets, market sources said.

One misstep was MCG’s investment in Broadview Networks. The company, a provider of communications and IT solutions to small and midsize businesses, filed for Chapter 11 in 2012. MCG Capital owned more than 51% of the equity at the end of 2011.

Another black eye for MCG Capital was an investment in plant-and-flower producer Color Star Growers of Colorado. The company filed for bankruptcy in December 2013, resulting in a loss of $13.5 million that year for MCG Capital. Regions Bank claimed its losses totaled $35 million for the transaction.

MCG Capital filed a suit against the company’s auditor, alleging accounting fraud and material misrepresentation of Color Star’s financial state at the time of a subordinated loan transaction with Color Star in November 2012.

Some say the writing was on the wall as MCG Capital underwent a series of senior management changes. Keith Kennedy became CEO in April, succeeding B. Hagen Saville, who retired. In November 2012, Saville took over from Richard Neu, who stayed on as board chair. Neu was elected to the post in October 2011, taking over from Steven Tunney, who left the company to pursue other interests. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.