Solar Capital Partners is seeking to grow in what it sees as one of the few remaining spaces where opportunity abounds since regional banks retrenched after the credit crisis: unitranche lending to middle-market companies. The investment firm, which manages two BDCs, has teamed up with PIMCO in the venture.
This month, the Solar Capital BDC, which trades on Nasdaq under the ticker symbol SLRC, announced the formation of a joint venture with PIMCO to focus on unitranche loans to private equity-owned and entrepreneur-owned middle-market companies, targeting companies across sectors with a steady track record of generating annual EBITDA of $20-50 million.
The unitranche initiative marks the first time Solar Capital will have the scale needed to underwrite and hold entire unitranche loans, adding to the range of products already offered to its private equity clients.
The joint venture will initially comprise equity commitments of $300 million from Solar Capital and $43.25 million from the PIMCO affiliate. The PIMCO affiliate committed an additional $256.75 million of capital to co-invest in unitranche loans alongside the joint venture. With expected eventual leverage of 2x debt-to-equity, the unitranche loan program will have $1.5-1.8 billion of investable capital.
“To be relevant in this space, you need to write a check for $100 million to $200 million. That’s why we sought a joint venture partner,” said Michael Gross, CEO and co-founder of the investment firm.
“This is not the type of leverage that CLOs are using—ours is a conservative up to 2x. So we don’t need to rely on buoyant credit markets,” said Gross. “But the leverage will allow us to scale up and buy bigger pieces of the same loan, and thus become more relevant to the borrower.”
Despite the frothiness in credit markets, middle-market unitranche lending remains attractive, according to Gross. There, leverage levels have remained at 4.5-5.5x, covenants are intact, and capital structures still have a significant equity cushion, Gross said.
“From a borrower’s perspective the market is very attractive. As an investor, it’s time to be incredibly selective,” said Bruce Spohler, Solar Capital’s chief operating officer and co-founder of the investment firm.
Recovery rates for unitranche loans are still untested for the most part, but will likely fall between the recovery levels of mezzanine debt and middle-market bank loans, said Gross.
As of June 30, Solar Capital’s portfolio was valued at $984 million, consisting of 43 portfolio companies and was invested roughly 74% in senior secured loans and Crystal Financial, whose loans are 100% senior secured. Among Solar Capital’s portfolio were loans backingAdams Outdoor, WireCo, Global Tel*Link, and Blue Coat Systems.
In addition to the Solar Capital SLRC BDC, Solar Capital Partners also manages Solar Senior Capital, which trades on Nasdaq under the ticker symbol SUNS. Solar Senior Capital BDC last week unveiled a first-lien loan joint venture with Voya Investment Management.
Solar Senior Capital committed $50 million to the first-lien loan program with Voya Investment Management, while Voya is committing $7.25 million. Management also expects to leverage this vehicle 2x debt-to-equity. Voya Investment Management, an investment advisor for several insurance subsidiaries of NYSE-listed Voya Financial, was formerly known as ING U.S.
As of June 30, Solar Senior Capital’s portfolio was valued at $266 million, consisting of 37 portfolio companies and was invested roughly 97% in senior secured loans and Gemino Senior Secured Healthcare, whose loans are 100% senior secured. Among Solar Senior’s portfolio were loans backing Aegis Toxicology Sciences, Asurion, ConvergeOne, and Genex.
Solar Capital and Solar Senior Capital expect to begin funding investments in their respective joint ventures before year-end.
Unitranche loans, usually from a single lender, offer an interest rate between that of senior loans and subordinated debt. For borrowers, these loans are simpler to manage because they are not from a group of lenders. From the lender’s perspective, unitranche loans could see a larger recovery in the event of a default due to the absence of more senior or junior creditors. – Abby Latour
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