Heartland inks $425M pro rata facility for Splenda acquisition

Privately owned Heartland Consumer Products, in a partnership with Centerbridge Partners, has obtained a $425 million pro rata credit facility in connection with the company’s acquisition of the Splenda brand from Johnson & Johnson Consumer Inc., sources said.

The credit facility includes a $375 million, six-year A term loan and a $50 million senior secured revolver.

Rabobank, Regions Bank, Fifth Third, KeyBank, and ING acted as joint lead arrangers. Rabobank acted as left lead and is administrative agent.

Heartland is a producer of tabletop sweeteners. Centerbridge Partners is a private equity firm based in New York. — Richard Kellerhals


Like smaller peers, larger companies’ earnings likely slowed in 3Q

An index tracking private middle market companies has foreshadowed a slowdown in revenue and earnings of larger public companies in the third quarter of 2015.

“We expect to see the theme of slower growth play out this earnings season,” said Edward Altman, the Max L. Heine Professor of Finance, Emeritus at the NYU Stern School of Business.

“Middle market companies have historically outperformed their larger public peers, so we anticipate relatively low year-over-year revenue and especially EBITDA growth from S&P component companies in the third quarter,” said Altman.

Altman collaborated with Golub Capital on the Golub Capital Altman Index, which was featured today in the second edition of the quarterly Golub Capital Middle Market Report, which includes an analysis of the index. The index is based on the sales and earnings data of roughly 150 private U.S. companies in Golub Capital’s loan portfolio.

The index showed revenue of privately held middle market companies increased 7.95% year-over-year in the first two months of the third quarter of 2015, compared to 9.26% in the first two months of the second quarter of 2015.

EBITDA rose by 3.95% in the third quarter, compared to an increase of 6.93% year-over-year during the first two months of the second quarter of 2015.

Still, the index shows that private middle market companies remain a resilient driver of economic growth, said Lawrence Golub, Golub Capital’s CEO.

“While revenues and earnings in the period grew at a healthy pace, margins continued to be pressured by such factors as rising labor costs and the strength of the U.S. dollar, which is impacting the pricing power of U.S. firms with international competitors,” Golub said.

The index showed an 8.84% increase in revenue and a 9.88% increase in earnings for the healthcare sector. This was probably due to the Affordable Care Act, which increased access to health care services, the report said.

Revenue of private middle market industrial companies fell 0.68% year-on-year in the third quarter, and earnings of industrial companies fell 1.62%.

Revenue of private middle market information technology companies rose 6.65%, but earnings slumped 3.62%.

“The information technology sector saw negative profit growth, reflecting, we believe, greater investment in product development,” said Golub.

The index contains limited exposure to the financials, utilities, energy, and materials sectors. Thus, calculations are made for the public indexes both including and excluding these sectors.

The index “is the first and only index based on actual sales and earnings data for middle market companies,” the report said.

“The index has served as a reliable indicator of the overall growth rates in revenue and earnings of public companies in market indexes such as the S&P 500 and S&P SmallCap 600, as well as quarterly GDP, according to statistical backtesting dating back to 2012, when data began to be tracked,” the report said. — Abby Latour

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Fifth Street-backed platform seeks to update middle-market lending

Len Tannenbaum, the founder of Fifth Street Asset Management, is seeking to modernize middle-market lending with a new platform where arrangers of these loans intersect with investors.

“The process for middle-market loan syndications remains inefficient and cumbersome and has not changed in any meaningful way over the last few decades,” said Tannenbaum, who is also CEO of Fifth Street Asset Management.

“It involves a tight club of 50 to 100 lenders that spend an enormous amount of time scheduling calls with each other, scribbling on notepads and sending forms back and forth via fax.”

Thus, Tannenbaum is launching MMKT, which will tackle the inefficiencies of syndication to middle-market companies. A full launch of the system is slated for the first quarter of 2016.

In recent years, lenders to middle-market companies have multiplied as banks curtail lending to these borrowers in the face of stricter regulation.

MMKT’s end-to-end platform was built using advanced encryption technology. Open to qualified institutional buyers only, potential investors will be able to browse loan listings, analyze private company information, register loan commitments, purchase loans, and take assignment of loans. Lenders can also list holdings through the platform and sell loan investments.

Loan originators will be able to submit loan details, enter diligence data, and sell loans to selected private or public groups. Financial sponsors and borrowers will be able to manage the loan buying process, and carry out post-closing and agency tasks.

Technology for the project was spearheaded by Len’s brother, David, who was chief technology officer of LiftDNA, a supply side platform, before it was acquired by digital advertising company OpenX in February 2012. David Tannenbaum is president of MMKT. Len Tannenbaum is interim CEO of MMKT.

The MMKT platform offers greater functionality than existing products geared to the loan market, and is more specifically tailored to the middle market lending process, Tannenbaum said. Eventually, MMKT will expand to secondary middle market loan trading.

“A big problem today in the loan market is that many loans are not based on actual bids and offers; they are based on indicative quotes that may not be updated. These indicative quotes are not real,” Tannenbaum said.

“We believe every market started off as closed, non-transparent markets. As part of their evolution, many have opened up. As we move towards a more liquid and transparent middle market lending industry, some may not be able to take advantage of inefficiencies anymore. Those not marking their books appropriately may not like this offering.”

So far, Fifth Street has closed syndication of a Fifth Street one-stop financing via the platform. MMKT is not accepting non-Fifth Street loan listings at this time, until the technology and user process is ready. Eventually, it will be open to other loan originators, who Tannenbaum believes will similarly benefit from using the MMKT platform, saving time and resources.

Smaller lenders, too, will reap benefits from the platform by syndicating their deals in MMKT and by gaining access to deals syndicated by other lenders. MMKT’s technology will likewise work for the co-investment process.

Fifth Street defines middle market as companies generating EBITDA of $10-100 million. MMKT is set up to syndicate deals of any size, but is optimized for syndicating deals that fall within Fifth Street’s traditional definition of middle market.

MMKT is expected to syndicate several large transactions over the next few months. Tannenbaum estimates the size of the market could be $100 billion per year.

“The technology and solution is applicable to many other liquid markets as well,” he said.

Fifth Street Asset Management is an asset-management company that advises two Fifth Street BDCs. Fifth Street Floating Rate Corp. trades on the Nasdaq as FSFR and provides sponsor-backed midsize companies with senior secured loans. Fifth Street Finance Corp. trades on Nasdaq as FSC and focuses on lending to sponsor-backed small and midsize companies. – Abby Latour

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Standard & Poor’s cuts ratings on Prospect Capital, outlook stable

Standard & Poor’s Ratings Services cut ratings on Prospect Capital, citing weaker capital, leverage, and earnings metrics than sector peers and expectations that the company will continue to operate with relatively “higher portfolio risk” away from its core lending portfolio.

Standard & Poor’s cut the issuer and the unsecured debt ratings to BBB-, from BBB. The outlook is stable, in part due to an expected debt-to-equity ratio of less than 0.85x moving forward.

“Prospect Capital Corp.’s (PSEC) capital, leverage, and earnings metrics have been weaker relative to similarly rated peers over several quarters,” Standard & Poor’s analyst Olga Roman said in a Sept. 29 research note.

“Additionally, we have changed our expectations regarding the reduction of portfolio risk based on updated management guidance on the potential size of the spin-offs of certain businesses.”

Prospect Capital management plans to sell certain operations, including its CLO structured credit business, online lending, and real estate business, or roughly 10% of the company’s asset base. Standard & Poor’s had expected a larger share of spin-offs.

Prospect Capital’s largest investment holding as of June 30 was National Property REIT Corp. (NPRC), whose portfolio consisted of multifamily properties, commercial properties, and consumer online lending portfolios.

After NPRC, Prospect’s top five investments accounted for 56% of its adjusted total equity (ATE) in the last 12 months ended June 30. The share should decline to below 50% due to expected syndication of these investments.

“Although our assessment of the company’s capital, leverage, and earnings (CLE) and risk position remain unchanged, the above mentioned factors resulted in a negative one notch comparable ratings adjustment.”

Prospect Capital’s debt-to-equity was 0.81x, and asset coverage was 228% as of June 30.

“The stable rating outlook reflects our expectation that PSEC will continue to operate with debt to equity below 0.85x and will improve its realized return on average portfolio investments above 5% and its non-deal-dependent income coverage of both interest and dividend above 1x,” Roman said.

As of June 30, Prospect Capital’s investment portfolio totaled $6.6 billion, covering 131 portfolio companies, and was generating an annualized yield of 12.7%.

“Our ratings on PSEC also reflect the company’s “adequate” business position, based on its market position as the second-largest externally managed BDC; its focus on senior secured investments; and its relatively diversified portfolio.”

Prospect Capital, a BDC, lends to and invests in privately held middle-market companies. Shares trade on the Nasdaq under the ticker PSEC. – Abby Latour

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New Capital Southwest BDC to stand out by geography, partnership

It is not lost on Capital Southwest’s management that they are latecomers in the credit cycle to the increasingly crowded playing field of middle-market lending.

The company is undergoing a transformation that will create two publicly traded entities: an internally managed BDC that will focus on lending to middle-market companies and retain the Capital Southwest name, and a diversified growth company called CSW Industrials.

Shareholders of Capital Southwest will receive stock in CSW Industrials as a tax-free dividend. Shares in CSW Industrials are due to begin trading on Oct. 1 on NASDAQ under the ticker symbol CSWI. The company split was unveiled in December 2014.

On the eve of the transaction, management says they are prepared for the challenges.

“We wake up every morning with the worry about entering late in the credit cycle,” Bowen Diehl said. Diehl, the company’s chief investment officer hired in early 2014, will become CEO of the new Capital Southwest. Michael Sarner, hired in July, will become CFO following the spin-off. Both Diehl and Sarner previously worked at American Capital. “But we’re buyers of assets, so maybe the sell-off will take some of the froth out of the market.”

At least initially, the Dallas-based company will use geography to differentiate itself, originating most of transactions from a network of relationships in the southwest and southern U.S. Although Texas-based, they have little energy exposure among legacy equity investments.

They plan to assemble a granular credit portfolio across asset classes and industries.

To execute their plan, Capital Southwest announced a partnership this month with rival BDC Main Street Capital, based in Houston. Capital Southwest will initially inject $68 million into the joint-venture fund, and Main Street, $17 million. Capital Southwest will own 80% of the fund, and share in 75.6% of profits. Main Street will own 20%, and have a profits interest of 24.4%.

“Main Street has a robust and well-established origination platform in first-lien syndicated credits. To develop that, we’d have to hire three to four people. We think this is a win-win for shareholders of both Capital Southwest and Main Street,” said Diehl in an interview.

In January, Capital Southwest hired Douglas Kelley, who had been a managing director in American Capital’s sponsor finance practice for middle market companies. In June, Capital Southwest announced the hiring of Josh Weinstein from H.I.G. WhiteHorse, to source direct-lending and middle-market syndicated credits. Capital Southwest also expanded their team with the hiring of a couple of associates.

Thus, Capital Southwest’s team is largely set for the near term.

As part of the transition, Capital Southwest has divested $210 million of equity investments in the past 15 months, realizing $181 million of capital gains. In the future, equity exposure in the investment portfolio will be capped at 10-15%.

“We are no longer a buy-and-hold-indefinitely investment company,” said Diehl.

The company has already begun to ramp up the new credit portfolio, investing $42 million in eight middle-market credit investments.

Among these investments are a $7 million, second-lien loan (L+875) to data collection company Research Now; a $7 million second-lien loan (L+925) to Boyd Corp.; a $5 million second-lien loan (L+800) to retailer Bob’s Discount Furniture; and a $5 million second-lien loan (L+775) to Cast & Crew Entertainment Services. New credit investments include a direct loan to Freedom Truck Finance, as a $5.4 million last-out senior debt (P+975), and industrial supplier Winzer, as $8.1 million, 11% subordinated debt.

Capital Southwest’s credit portfolio will eventually be middle-market loans roughly balanced between lower-middle-market companies generating EBITDA of $3-15 million, and upper-middle market companies generating EBITDA of more than $50 million.

The company’s largest legacy equity investment is Media Recovery, which is the holding company of ShockWatch. The Dallas-based company manufactures indicators and recording devices to measure impact, tilt and temperature during transit. The fair value of the equity investment was roughly $30 million as of June 30.

Setting up the Main Street joint venture early in the transformation process has been positive. Moreover, Capital Southwest has $105 million of cash to investment after the $68 million committed to the Main Street joint venture.

“We are focused on strong credits. We are not in a hurry to put cash to work, but rather thoughtfully constructing a portfolio which produces a consistent market dividend for our shareholders,” said Sarner, CFO of the new company. –Abby Latour

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Ascensus to be acquired by Genstar, Aquiline

Middle-market private equity firms Genstar Capital and Aquiline Capital Partners have teamed up to buy Ascensus from J.C. Flowers & Co., according to a statement. The acquisition is subject to regulatory approvals and other customary closing conditions and is expected to wrap up in the fourth quarter.

Ascensus has existing loans that date to a November 2013 placement via lead arrangers BMO Capital Markets and Golub Capital. At the time Ascensus issued a $200 million first-lien term loan due 2019 (L+400, 1% LIBOR floor) and a $92 million second-lien term loan due 2020 (L+800, 1% floor).

Existing facility ratings are B/B1 on the first-lien debt and CCC+/Caa1 for the second-lien debt. Current corporate ratings are B/B2.

Dresher, Pa.-based Ascensus provides retirement services, including record-keeping and administrative services, supporting more than 40,000 retirement plans and 3.3 million 529 college savings accounts. It also administers more than 1.5 million IRAs and health savings accounts. – Jon Hemingway



Poll shows 81% of middle market leaders mulling M&A over next 3 yrs

In a survey of nearly 700 leaders of privately owned middle market companies, 81% say they are interested in some form of M&A activity over the next three years.

Middle market investment bank Harris Williams & Co. partnered with Inc. to carry out the survey, for which owners, partners, and managers at middle market companies were questioned about future growth plans.

Asked about choice of a potential buyer, the preferred choice was for a public or private corporation that is a strategic buyer. The second ranked response was split between a private equity firm and employees.

“M&A is top of mind for high-growth companies and new, high-quality assets will continue to come to market as these companies explore their options for the next phase of the business,” the survey results said.

“With the current M&A market at its strongest since 2007, the supply of high-quality companies coming to market continues to show great promise. While some business leaders intend to buy or merge with another company to drive further growth, 51.8% indicated that they anticipated selling their business.”

Of the respondents, 25% said they have a detailed exit strategy planned. The largest group, or 43%, reported that their strategy was still evolving, and 30% said they did not yet have one, the survey said. – Abby Latour

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Stone Source recapitalized by sponsor Founders Equity

Graycliff Partners provided subordinated debt to Stone Source as part of a recapitalization of the company by Founders Equity.

Stone Source, based in New York City, supplies high-end natural stone and other surface products to architects and designers, including porcelain and glass tile, engineered stone, and reclaimed wood.

Founders Equity invested in Stone Source in 2006.

Founders Equity targets companies that generate annual revenue of $20-150 million for recapitalizations, buyouts, take-private transactions, and turnarounds. – Abby Latour

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Middle Market: 2Q 2015 BDC portfolios now available on LCD

The 2Q 2015 portfolios of 46 publicly listed and non-listed BDCs are now available for download on LCD’s new Middle Market landing page.

In addition to the 2Q 2015 portfolios, the file now includes all historical BDC portfolio data to make searching and historical comparisons easier.

Once again, MVC Capital’s portfolio is absent due to delayed filings as the company works through accounting and control issues at MVC Auto, a European unit. Click here to read more details.

Non-accrual investments have been tallied as a percentage of all debt investments, at cost.

View the FAQ tab for answers to frequently asked questions. – Kelly Thompson

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To view a sample of the data, contact Marc Auerbach at 212-438-2703


GTT Communications eyes $450M loans for One Source Networks buy

GTT Communications disclosed that it has engaged KeyBank and SunTrust Robinson to provide a $400 million B term loan and $50 million revolver in connection with the acquisition of One Source Networks. The syndication process for this new debt will begin immediately, the company noted.

Proceeds will also be used to replace GTT’s current credit facility.

At closing, GTT expects its ratio of total debt to annualized adjusted EBITDA to be roughly 4x on a pro forma basis.

Under the terms of the acquisition, GTT will pay $175 million for One Source Networks, a provider of data and internet services. The deal is expected to close in late October.

For reference, in April, GTT boosted its pro rata credit facility by $130 million, extended the maturity to March 2020, from August 2019, and modified a leverage covenant via an amendment. The size of the A term loan was increased by $120 million, to $230 million, while the size of the revolver increased by $10 million, to $25 million. Pricing on the facility is tied to a leverage-based grid, at L+275-350.

GTT Communications, headquartered in McLean, Va., provides cloud networking services to enterprise, government, and wholesale customers. The company’s shares trade on the NYSE under the ticker GTT. –Richard Kellerhals/Jon Hemingway