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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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CDPQ to Grow Private Debt Business with Hire of Hetu, Others

cdpqCaisse de dépôt et placement du Québec (CDPQ) is continuing its push into the U.S. private debt sector with the hire of Robert Hetu, who will lead CDPQ’s efforts in that market.

Hetu joined CDPQ in June from Credit Suisse, where he was a managing director in the investment banking department, leading the corporate lending team. Prior to CS Hetu was a senior manager in structured finance at Societe Generale in Montreal. He will be involved with sourcing U.S. private debt opportunities.

In addition to Hetu, CDPQ will hire to expand their private debt efforts in the next year, in Montreal and London. The long-term vision is to expand private debt efforts across the Atlantic, into Europe. CDPQ’s credit strategy is separated into four areas: corporate credit, specialty finance, real estate, and sovereign credit. Private debt, across these four areas, makes up $32.4 billion of the $66.7 billion fixed income portfolio, according to the company.

Jim McMullan, senior vice president in charge of the corporate credit team at CDPQ, explains that the gradual push toward leveraged finance is “not a revolution, it’s an evolution” motivated by “higher returns for [their] clients with the specter of higher interest rates.” CDPQ’s private debt strategy focuses on the upper middle market.

While there is no firm investment criteria concerning company size, the firm “focuses on more sizeable investments of $100+ million positions in a single investment,” according to McMullan, who stresses that CDPQ “wants to [work] with partners versus being the sole underwriter,” and aims to invest across the capital structure. As an example, McMullan referenced CDPQ’s $1.9 billion investment to support SNC-Lavalin’s acquisition of WS Atkins. The firm provided $1.5 billion in debt and $400 million in equity.

“The push towards leveraged finance opportunities is more people-intensive,” McMullan says. “Historically, there have been around 10 to 15 people on the corporate credit team, and we expect within the next year to be around 20.” — Shivan Bhavnani

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Leveraged Loans: Covenant-Lite Structure Gains Ground in Middle Market

middle market cov-lite loans

Covenant-lite structures, long common among larger loans that are broadly syndicated to institutional investors, are increasingly finding their way into smaller transactions.

An imbalance between supply and demand leveraged loan paper, stoked by fundraising for higher-yielding middle market credits, is behind the expansion of borrower-friendly features.

So far in 2017, the share of covenant-lite deals with debt totaling less than $250 million has climbed to 27%, from 11% in 2016. The share this year is roughly on par with that in 2015, LCD data shows.

Among covenant-lite deals now in market is a $200 million loan backing lift-truck manufacturer Hyster-Yale Group. Pricing on the loan, which was initially brought to market at L+425–450, at a 99 original-issue discount, was tightened due to investor demand, to L+400, at 99.75.

Covenant-lite loans are credits that feature bond-like incurrence covenants, as opposed to more restrictive maintenance covenants (you can read more about how cov-lite loans work here).

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Värde Partners hires Mamik to Lead Middle Market Lending Group

Värde Partners has hired Aneek Mamik to originate debt to middle-market companies. He started in September, and is based in New York.

He will be North American head of specialty finance, and a team of specialty finance employees will report to him. Currently, Mamik has two direct reports, and Värde Partners is planning to hire 2–3 more for this team.

Mamik reports to Rick Noel, head of global specialty finance at Värde Partners.

Mamik joined from GE Capital, where he worked in various M&A roles, most recently as head of mergers and acquisitions where he led the sale of more than $100 billion in assets.

Mamik started his career at GE’s Australian consumer finance platform, which was acquired by Värde Partners and re-branded as Latitude Financial Services.

Värde Partners’ specialty finance division invests in middle-market companies through three business lines: private equity, portfolio company acquisitions, and direct lending. — Abby Latour

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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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NewStar Prices $506M Middle Market CLO; YTD Issuance: $49.71B

Citi today priced a $505.5 million middle market CLO for NewStar Financial, according to market sources. This is the manager’s second middle market CLO of the year.

The transaction is structured to be compliant with risk retention in Europe, with the manager retaining a horizontal slice.

Pricing details are as follows, with the CLO upsized from its originally marketed size of $405.2 million:

The transaction will close on November 29 with the non-call period running until October 25, 2018, and reinvestment period ending on October 25, 2020. A weighted average life (WAL) test will also end on November 29, 2024. The legal final maturity is October 25, 2028.

Year-to-date issuance is now $49.71 billion from 110 transactions, according to LCD data. October issuance is now $3.63 billion from seven CLOs. Andrew Park

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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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SAExploration Wraps Debt-for-Equity Restructure, Nets New Loan

SAExploration entered into a new $30 million term loan agreement as part of a successful debt-for-equity restructuring.

Bondholders received new second-lien notes and equity at below-par value.

SAExplorationIn exchange for $138 million of 10% secured notes due 2019, the company issued $69 million of new 10% (11% PIK) secured second-lien notes due 2019, and 6.4 million of new common stock, following a reverse stock split.

The company announced in June it had entered a comprehensive restructuring support agreement with holders of 66% of 10% secured notes. At the close of the offer, which expired on July 22, nearly 99% of notes were exchanged.

Liens on the new second-lien notes due 2019 are subordinate to liens on an existing $20 million revolver with Wells Fargo dating from November 2014, as well as on the $30 million multi-draw senior secured term loan that SAE entered into on June 29 with certain 10% secured noteholders.

As of May 16, the borrower owed $13.4 million under the revolver.

Low oil and natural gas prices hurt the company, as well as a delayed payment for a large receivable from a specific customer due to uncertainty over tax credits from the State of Alaska.

In a debut high-yield bond issue, SAExploration placed $150 million of 10% secured notes due 2019 at par in June 2014 via sole bookrunner Jefferies. Proceeds refinanced debt and funded equipment purchases for operations in Alaska.

SAExploration provides seismic data acquisition services to oil-and-gas E&P companies, specializing in logistically challenging, remote, and environmentally sensitive regions such as Arctic Alaska, tropical South America, and shallow and deep-water marine environments. — 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.