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Gladstone Capital adds GFRC Cladding Systems loan to non-accrual

Gladstone Capital added GFRC Cladding Systems to non-accrual status in the quarter ended March 31, citing declining operation performance.

The investment comprised a $4.9 million 10.5% first-lien debt due 2016, marked under one million at fair value as of March 31; $6.6 million of second-lien debt due 2016, marked at $1.9 million at fair value; and a line of credit, a Ma y 6 10-Q filing showed.

GFRC Cladding Systems designs and manufactures glass-fiber-reinforced concrete panels for commercial construction projects greater than four stories in height. It is a portfolio company of Dallas-based middle-market private equity firm Transition Capital Partners.

The other two companies on non-accrual status in the recent quarter were Sunshine Media and Heartland Communications.

Some tranches of the investment in Sunshine Media were moved to accrual status in the quarter as a result of improving profitability and liquidity.

The investment in Sunshine Media comprised first-lien debt, a line of credit, and equity. Sunshine Media, based in Chattanooga, Tenn., publishes local business-to-business custom publications with titles such asBuilder/ArchitectDoctor of Dentistry, and MD News.

The investment in Heartland Communications comprised a $4.3 million 5% term loan due 2014, a line of credit, and equity. Heartland Communications, based in Appleton, Wis., operates AM and FM radio stations in Park Falls, Eagle River, and Ashland, Wis.; and Iron River and Houghton, Mich.

As of March 31, 2015, debt of three portfolio companies on non-accrual status totaled $39.2 million on a cost basis, or 10.2% of all debt investments, and $9.2 million, or 2.8% at fair value.

As of Dec. 31, 2014, non-accrual debt on a cost basis totaled $33.6 million over two portfolio companies, or 9.4%, and $8.3 million, or 2.8%, at fair value.

Gladstone Capital, which trades on Nasdaq under the symbol GLAD, is an externally managed BDC that invests in debt and equity of small and midsize U.S. businesses. – Abby Latour

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Capital Southwest affiliate to buy Strathmore Products with $70M loan

Capital Southwest, a BDC whose shares trade as CSWC on Nasdaq, announced it would buy Strathmore Products through an affiliate using a $70 million term loan.

Lenders are J.P. Morgan Chase, SunTrust Bank, Comerica Bank, and Amegy Bank, an SEC filing today showed.

The assets were acquired through the Whitmore Manufacturing Company, a subsidiary of Capital Southwest. The acquisition provides an opportunity for further acquisitions in industrial coatings.

Strathmore Products, based in Syracuse, N.Y., manufactures specialty industrial coatings such as urethanes, epoxies, acrylics, and alkyds used for rail, power generation, oil and gas, and other industrial uses.

Dallas-based Capital Southwest is a BDC that invests in controlling and minority stakes of private companies with assets of $750 million.

In December, Capital Southwest’s board approved a split of the company, creating a lender that will target middle-market companies in the Southwestern U.S.. The spin-off will create two publicly traded entities, an internally-managed BDC and a diversified growth company called Industrial Co., including Whitmore.

The spin-off is due to be completed by the end of the third quarter. – Abby Latour

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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

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InMotion receives financing from Fifth Street for acquisition

Fifth Street Finance Corp. provided the debt financing that supported the acquisition of Airport Wireless Holdings by InMotion Entertainment Group, a portfolio company of private equity firms Bruckmann, Rosser, Sherrill & Co. and Palladin Consumer Retail Partners. No further details about the financing were available.

Airport Wireless is an airport-based retailer of consumer electronics and accessories that operates under Airport Wireless, techshowcase, Tech Interaction, tech in a sec, and Touch Table.

InMotion was formed late in 2013 when BRS and Palladin acquired the assets of Project Horizon from Gate Petroleum Company. Fifth Street Finance was lead arranger and agent on a $48.2 million unitranche financing for the buyout, and also co-invested in the deal. That term loan due October 2018 for InMotion priced at L+775 with a 1.25% floor, SEC filings show.

InMotion Entertainment Group, based in Jacksonville, Fla., is an airport-based retailer. With the acquisition, the company operates 120 locations in airports across the U.S. under the InMotion Entertainment, Soundbalance, and Headphone Hub banners. – Jon Hemingway

 

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Capitala Finance says no energy sector loans in default in Q1

Capitala Finance said that of the five companies in its investment portfolio with direct exposure to the oil-and-gas sector, all of them were current with debt payments.

“All investments continue to perform and the fair value of oil-and-gas investments was approximately 87.2% of cost at March 31, 2015, compared to 89.5% at Dec. 31, 2014,” an investor presentation today showed.

The investments are:

  • Sierra Hamilton $15 million 12.25% secured loan due 2018, marked $14.5 million at fair value as of March 31, 2015 (no change from Dec. 31, 2014), accounting for 6.1% of net assets
  • TC Safety $22.6 million investment (6.6% lower than Dec. 31, 2014 on a fair value basis), including a 12% cash, 2% PIK subordinated loan due 2018
  • U.S. Well Services $8.8 million 11.5% (0.5% floor) secured loan due 2019 (increased by $4 million since year-end due to previous unfunded commitment)
  • ABUTEC $4.9 million 12% cash, 3% PIK term loan due 2017 (down 4.2% from year-end on a fair value basis), for 2.1% of assets
  • SPARUS, Southern Cross, EZTECH $10.5 million investment fair value as of March 31, 2015, down 0.7% from year-end

These investments at fair value total $61.3 million as of March 31, 2015, or 11.8% of the total. Fair value is 3.6% higher than at year-end.

A breakdown of Capitala Finance’s portfolio by sector showed oil-and-gas services accounted for 7% of the total portfolio by fair value, and oil-and-gas engineering and consulting services accounted for 2.8% at the end of the first quarter.

As of March 31, 2015, Capitala Finance’s portfolio comprised 54 portfolio companies with a fair value of approximately $518.9 million. Of that total, 35% was senior secured debt investments, 45% was subordinated debt, 18% was equity and warrants, and 2% was the Capitala Senior Liquid Loan Fund I.

Capitala’s portfolio as of Dec. 31 consisted of 52 portfolio companies with a fair market value of $480.3 million. Of that total, 31% was senior secured debt investments, 46% was subordinated debt, and 23% was equity and warrants.

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. – Abby Latour

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Middle market: Monomoy Capital taps Robbins to head credit strategies

monomoy capitalMonomoy Capital Partners has hired David Robbins as Managing Director and Head of Credit Strategies. Robbins will lead the firm’s investments in debt securities of distressed and underperforming businesses.

Robbins joins from H.I.G. Bayside Capital where he was a managing director responsible for leading investments in distressed debt and positioning Bayside to take control of middle market companies through financial restructurings. Prior to that, he held positions GSC Group and the Blackstone Group.

New York-based Monomoy Capital Partners is a private equity firm focused on value investing and business improvement in the middle market. The firm targets middle market businesses with annual revenue of $100-600 million in a wide range of industries that face operational, financial, and strategic challenges. – Jon Hemingway

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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

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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

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Ares Capital sees opportunity, uncertainty from GE Capital sale

Ares Capital expects new market opportunities to arise due to the exit of GE Capital from its lending venture, but also sees uncertainty in the near future over the fate of the program.

GE announced in April it would divest GE Capital, including its $16 billion sponsor finance business. Ares has had a lending partnership with GE Capital since 2009, called the Senior Secured Loan Program (SSLP).

Addressing the planned GE Capital sale in a quarterly earnings call, Ares Capital CEO Kipp deVeer said Ares plans to continue supporting sponsors and businesses, either directly or through a new program with a new partner. This new partner may be looking to expand their lending to the middle market, or be entering the business for the first time.

“We believe that partnering with us and SSLP, or a similar joint venture, will be attractive to a number of third parties, and we are having active and productive dialogues with a few potential partners about buying GE’s interest, or about starting a new program,” said Ares Capital deVeer said on the earnings call on May 4.

He cautioned that there was no guarantee that Ares would reach a deal. In recent weeks, Ares has been working with potential parties, including non-U.S. regulated banks and non-banks such as asset managers, insurance companies, and combinations thereof.

“We’re feeling reasonably optimistic that we will find some interest,” deVeer said. “We’re down the path with a lot of different kinds of people, and it’s too early to understand who is going to be the most interested.”

In the meantime, it’s business as usual for the SSLP. There are five deals in the SSLP’s pipeline expected to close, deVeer said.

GE Capital is not allowed to unilaterally sell the loans in the SSLP. If no partner is found, the SSLP could be gradually wound down through repayment of the loans. The weighted average life of the SSLP loans was 4.3 years at the end of the first quarter.

The exit of GE Capital, and its access to lower-cost capital, will trigger a seismic shift in middle market lending overall, as well as result in a more favorable competitive landscape, deVeer said. It is further evidence of banks’ unwillingness to lend to middle market companies.

“This exit creates a significant opportunity for our company to grow our position in the market. It positions us to be a more active originator and syndicator of first lien senior debt, which traditionally has been a core business at GE Capital,” deVeer said.

“There is real room to occupy a place in that market as GE exits the business,” he added. – Abby Latour

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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

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Follow Kelly Thompson on @MMKTDoyenne.