Category Archives: Middle Market

content
at 9:22am

S&P: Europe’s middle market seeks new ways to fund growth

In a new report entitled “Europe’s Mid-Market Seeks New Ways To Fund Growth”, Standard & Poor’s comments that the development of a more cohesive alternative funding environment for mid-market companies in Europe is becoming more likely as banks continue to deleverage.

The report notes that midsize enterprises are more often seeking to diversify their funding sources as banks – their traditional lenders – embark on a deleveraging process that may take many years. At the same time, investors searching for yield increasingly want to diversify their investments into this new asset class.

However, despite some progress on linking together mid-market companies with willing capital, a cohesive pan-European solution is still elusive, S&P comments.

S&P goes on to say that alternatives, such as the non-bank lending market, private placements, and bond platforms on exchanges, are still in their infancy in Europe. What’s more, such alternatives lack cohesion, and operate in different regulatory and accounting environments.

Moreover, most of the current funding alternatives to bank lending and capital markets fundraising are still dominated by large companies. Of the 1,000 non-financial companies that S&P rates in Europe, only a handful are what S&P defines as mid-market – with revenues between €100 million and €1.5 billion, and outstanding debt between €50 million and €500 million.

As a result, S&P believes that developing an efficient pan-European funding market for these companies will necessitate changes for both issuers and investors. Expanding outside of a long-term banking relationship can be a significant cultural shift for debt issuers, while companies also regard interest rates demanded by institutional investors as too high in many cases, S&P comments. Better access to timely financial information could go some way toward helping investors to diversify into this new asset class, the agency adds.

The full report is titled “Underwriting The Recovery: Europe’s Mid-Market Seeks New Ways To Fund Growth”. Subscribers to RatingsDirect can access the research piece at www.globalcreditportal.com. Alternatively, to purchase/access the report, please contact Client Support Europe: +44 20 7176 7176 or clientsupporteurope@standardandpoors.com. – Staff Reports

content
at 7:33am

ICG closes European mezz fund as investor base diversifies

ICG has closed its mezzanine fund, the ICG Europe Fund V, at the maximum permitted size of €2.5 billion, the firm said in its interim management statement yesterday, highlighting the attractiveness of the asset class in the face of weak issuance in recent years.

The fund will invest in mezzanine debt in the European market, and has an investment period of five years. Roughly 26% of the fund has already been invested, sources added.

The target size of the fund was increased from an initial €2 billion, sources said. The investor base – which was largely dominated by European accounts in the past – has diversified, with European, U.S., and Asian interest comprising a third each.

The diversification of the investor base comes despite concern over European sovereigns and a challenging market environment, with sources noting that a number of investors saw opportunities in the European debt market, with many concluding that credit funds were attractive amid a low-interest-rate environment. While the retreat of bank lending meant that bank investors – who historically comprised 20% of the investor base – had to be replaced, new interest from sovereign wealth funds and increased interest from pension funds has more than plugged the gap, sources added.

As real returns remain constrained by low interest rates and a technical market environment, mezzanine loans remain an attractive proposition. Although the data is slightly patchy, mezzanine pricing has held up, especially in terms of total spread, with the rolling six-month average total spread peaking at E+1,208 last spring, according to LCD data. Comparatively, in the golden years of mezzanine loans, the average total spread was under E+1,000.

That said, recent issuance has been meagre. European mezzanine loan volume has hovered around the €1 billion mark since 2009, for a deal count of 10 in each of the last couple of years, according to LCD data. These figures are dwarfed by those seen previously, with mezzanine issuance peaking in 2007, at €12.76 billion. Deal flow is trickling through, however – at the end of last year Douglas signed a €200 million, eight-year mezzanine tranche paying E+550 cash and 6% PIK to support its Advent-backed take-private.

In addition, there are repayments to consider – already in 2013, Orange Austria, Atalian, and Cerba are repaying their existing mezzanine debt, while Avio has a €280 million mezzanine tranche being repaid as part of GE’s acquisition of the company.

Historically, ICG has participated in non-plain-vanilla transactions, which has translated into steady participation in deals for which pricing tends to be shielded from market technicals, sources said. The mezzanine loan market has a high standard deviation in terms of pricing, and while increased issuance could place some pressure on pricing, it may not affect ‘off-the-run’ type deals that price according to risk rather than in response to market technicals, sources added. – Sohko Fujimoto

content
at 3:35pm

WhiteHorse BDC goes public for $100M, with 12 deals at 12.8%

Miami, Fla.-based WhiteHorse Finance late yesterday raised $100 million in an initial public offering managed by Deutsche Bank, J.P. Morgan, Citigroup, and Barclays. WhiteHorse issued 6.7 million shares of common stock at $15 per share. Shares are scheduled to trade on the Nasdaq under the ticker WHF.

WhiteHorse will operate as a business-development corporation focused on secured loans to middle-market companies. The BDC will be managed by H.I.G. WhiteHorse Advisers, with Jay Carvell as CEO. The adviser will earn a 2% annual management fee on gross assets including cash and cash equivalents.

The adviser is an affiliate of H.I.G. Capital, which had over $8.5 billion of capital under management as of June.

As of June 30, 2012, WhiteHorse’s investment portfolio consisted of senior secured loans and senior notes across 12 deals totaling $280.3 million, with a weighted average yield of 12.8% and an average life to maturity of 2.8 years. WhiteHorse aims to generate a 9.3% annualized return for the first quarter 2013.

At the end of June, the portfolio had an average investment size of $23.4 million, with investments ranging from $1.6-47.9 million.

WhiteHorse defines middle-market companies as those with enterprise values of $50-350 million. The company plans to originate and invest in first- and second-lien loans that will have a term of 3-6 years. WhiteHorse may opportunistically make investments in mezzanine loans or equity interests, and in companies outside of the middle market.

H.I.G. Capital acquired WhiteHorse Capital, a Dallas-based CLO manager, in October 2011 to expand middle-market investing. In January, H.I.G. then formed WhiteHorse Finance and contributed $176.3 million in assets in exchange for 11.7 million shares in WhiteHorse Finance.

WhiteHorse has a $150 million asset-based warehouse line via Natixis priced at a commercial-paper rate plus 2.25%, or L+275. WhiteHorse may draw under the revolver until May 2014, at which time outstandings term out to September 2020 and pricing rises by 50 bps.

The adviser must achieve a 7% annualized hurdle rate (1.75% quarterly) before earning any incentive fees. Thereafter, the adviser will collect quarterly 100% of net investment income generated between a 7% and 8.75% (2.1875% quarterly) yield, and 20% of net investment income that exceeds an 8.75% yield. The adviser can also earn 20% of WhiteHorse’s cumulative aggregate realized capital gains. – Kelly Thompson

Follow Kelly on Twitter @MMktDoyenne for middle-market financing news

content
at 10:57am

3Q middle-market review: The Wallflower to large cap’s social butterfly

In the third quarter, the middle market was the wallflower to the large-cap market’s social butterfly. At $2.9 billion, total volume edged past the second quarter’s $2.5 billion, but year-to-date business is way off, at $7.5 billion, versus $12.6 billion in the first three quarters of 2011, according to LCD.

At a time when middle-market loans should’ve been flying off the shelf, small-cap business barely got off the ground. The disconnect reflects the absence of M&A and few outstanding refinancing candidates. Dividend volume dropped to 6% of year-to-date volume, from 18% in the year-ago period, and refinancing is down to 25%, from 32% last year.

Bankers say sponsors already have turned over most of their portfolios. This week’s fourth-quarter opener was weak, to put it mildly. Of roughly 30 launches through Thursday, only one issuer – ComPsych – generates less than $50 million of EBITDA, according to sources. Some of the others generate EBITDA in the area of $60 million, and arguably still belong in the realm of middle-market lenders, especially when institutional accounts have plenty of bigger fish to fry, such as Hertz, Getty Images, and Valeant Pharmaceuticals.

Mandates have been hard-fought, with the middle market getting squeezed at both ends. Finance companies – Ares Capital, GE Capital, Golub Capital, NXT Capital, Prospect Capital, Monroe Capital, and investors such as Oaktree Capital, among others – are gobbling up the lower middle market with unitranche financing. LCD does not formally track unitranche volume, but Homecare Homebase shows the pricing pressure lenders are feeling to compete against the unitranche machine.

Homecare Homebase, a portfolio company of Cressey & Co. and SV Life Sciences, last week closed a $75 million senior secured financing via CIT Group, according to sources. The $75 million financing is split between a $5 million revolver and a $70 million term loan. Pricing is L+400, with a 1% LIBOR floor, according to sources. The term loan was issued at 99.

Club loans like Homecare Homebase sometimes net below-market rates, although L+400 is well inside the third-quarter averages of L+552 for institutional debt and L+511 for pro rata paper, according to LCD. The sponsors and management used proceeds to refinance debt and fund a roughly $70 million dividend payment. Management maintains majority control of the software business, while Cressey and SV Life own a minority stake, sources note.

There is no junior debt in the capital structure, and that highlights another party fighting for business: mezzanine providers. Mezzanine debt is tightening to compete with unitranche rates, which are under pressure as well, sources say. The $115 million in mezzanine debt backing the buyout of Centerplate is rumored at 11.75% all-in, according to sources. Meanwhile, the unitranche loan that closed this summer forBenihana was under 9%, they say. Over the past two years, mezzanine has hovered in the 12-14% range, all-in, while unitranche loans historically have priced in the 9-10% area.

The lower segment of the market always has been the turf of club-style executions, but that’s especially the case today as competition for sub-$25-million EBITDA deals pushes traditional lenders up the food chain. Pro forma EBITDA has risen steadily for syndicated deals in 2012. Average pro forma EBITDA in the year to date is a record $37.4 million, up from $37.1 million in 2011, $34.1 million in 2010, and $27.9 million in 2009.

M&A-related business has shown signs of life in recent weeks, but arrangers are treading cautiously. Buyers and sellers remain far apart on price, and tentative agreements are vulnerable to collapse at the negotiating table.

Middle-market purchase-price multiples for LBOs dropped further in the third quarter, averaging 7.2x, down from 8.3x in the second quarter, according to LCD. In the year to date, multiples stand at 7.6x, down from 8.2x in the first three months of 2011 and from 8.4x in 2010.

By contrast, multiples for large-corporate LBOs jumped again in the third quarter, with private equity firms chasing after public companies, which have seen their stock prices soar over the past year. Third-quarter multiples for large LBOs hit 9.6x, up from 7.9x in the second quarter.

Tack-on purchases kept M&A alive July through September. That didn’t move the meter much in terms of volume, however. Acquisitions accounted for 14% of total middle-market volume, down from 21% in the second quarter. In the year to date, acquisitions are 21% of total volume, up from 8% in the same period last year and 15% in 2010.

Some issuers left the nest in the third quarter, with Ollie’s Bargain Outlet, Fort Dearborn, Camp Systems International, Peak 10, and other erstwhile middle-market names graduating into a broader pool of capital. While the optimist would say these growing businesses are a sign of an improving economy, the pessimist would argue that the capital markets are off their rocker.

3Q stat snapshot

  • Pricing: Institutional pricing for middle-market issuers with a single-B rating profile averaged L+550 in the third quarter, down from L+608 in the first half of 2012. Pro rata pricing fell to L+506, from L+535 in the first half.
  • Pricing premium: Institutional accounts earned an 89 bps premium, on average, for middle-market paper with a single-B rating profile over large-corporate single-B loans: L+550 versus L+462. That’s down from 114 bps in the first half: L+608 versus L+494.
  • Leverage: Senior leverage eased to an average of 3.7x, from 3.9x in the second quarter, but remains above the first quarter’s 3.4x multiple. Total leverage ended September at 4.3x, wide of 4.2x in the second quarter and 3.8x at the end of March.

– Kelly Thompson

Follow Kelly on Twitter @MMktDoyenne for middle-market financing news.

 

* Generally, LCD defines middle-market issuers as those that generate up to $50 million of EBITDA, though classifying an issuer as middle market sometimes is more art than science. LCD’s middle-market data include loans that are large enough to be syndicated (typically term loans totaling $100 million or more). The data also include small, club-size loans, but this segment of the market contributes only slightly to the data set. Bilateral loans are not included in LCD’s middle-market data. Research on bilateral loans is available to subscribers via LCD’s SME (small-to-medium enterprises) group.


content
at 3:59pm

Moelis enters middle market with purchase of Freeport Financial

Global investment bank and asset manager Moelis & Co. is jumping into middle-market lending with the purchase of Chicago-based Freeport Financial Partners. Terms of the deal have not been disclosed.

Freeport Financial, which will continue to operate out of Chicago under the same name, has invested $1.47 billion in 79 platform companies since 2005. Principals Matthew Gerdes, Josh Howie, Stephen Papalas, and Joseph Walker will continue to manage the lending business.

Moelis is the latest outsider to enter the middle-market space. Middle-market loan veterans Ian Fowler, Brian Baldwin and Mark Flessner joined Babson Capital this summer to launch a senior lending platform, also based in Chicago. All three have worked together for years, first at GE Capital, and later at Freeport Financial, which Fowler co-founded. Babson historically has targeted private equity and mezzanine investments.

Last year private equity firm Kayne Anderson Capital expanded its middle-market strategy with the formation of Kayne Senior Credit Advisors, a new fund that extends senior secured loans to companies. Kayne Anderson hired Ken Leonard, Al Ricchio and Andy Marek to run the new group from Chicago. The trio co-founded Chicago-based Dymas Capital Management in 2002 and worked previously at GE Capital and Heller Financial.

New banking regulations are forcing traditional banks to pull back on lending, and outsiders like Moelis and Babson are not alone in looking to fill that void. Existing CLO managers have raised new funds and finance companies such as Golub Capital are beefing up capital with new shares to chase after middle-market issuers.

Crescent Capital Group announced in June that it hired John Bowman and Scott Carpenter to lead a new strategy focused on private, lower-middle-market companies in the U.S. The new effort is called Crescent Direct Lending and located in the firm’s newly opened Boston office. The group focuses on companies with $3-25 million in EBITDA. – Kelly Thompson

Follow Kelly on Twitter @MMktDoyenne for middle-market financing news

content
at 5:07pm

Babson to take stab at senior lending with new Chicago-based group

Middle-market loan veterans Ian Fowler, Brian Baldwin and Mark Flessner have joined Babson Capital to launch a senior lending platform that is based in downtown Chicago.

All three have worked together for years, first at GE Capital, and later at Freeport Financial, which Fowler co-founded. Fowler heads the new group and reports to Michael Hermsen, head of Babson Capital’s global private finance group.

Babson, which historically has targeted private equity and mezzanine investments, has weighed the senior debt market for some time and decided now was the point to enter the space, Hermsen said.

Certainly, new banking regulations are forcing traditional banks to pull back on lending, and Babson is not alone in looking to fill that void. Existing CLO managers have raised new funds, finance companies have issued new shares and new players have come online over the past two years, all to offering financing to middle-market issuers.

Babson’s parent, MassMutual Financial Group, is funding the group, which will originate and participate in senior loans for issuers that generate roughly $10-50 million of EBITDA, with the sweet spot aimed at $10-30 million of EBITDA, according to Fowler. They will selectively lend to companies that generate less than $10 million of EBITDA, he added.

The group’s mandate is different from Jefferies Finance. Jefferies is another unit funded by MassMutual, but targets larger issuers that are served in the more broadly syndicated loan market. Jefferies provides syndicated loans and high-yield debt of $200 million and up, Hermsen noted.

Babson plans to target sponsored, as well as non-sponsored companies, and intends to pick up loans through the secondary market as a way to build relationships outside Babson’s existing circle of private equity clients, Fowler said.

With the new senior debt group, Babson will be able to offer a full spectrum of financing and may broaden its offerings to unitranche debt, a product that mixes senior and mezzanine debt into a single agreement at a blended rate. Lenders say rates on unitranche debt have become increasingly competitive over the last year or so amid a dearth of new-issue supply.

Babson Capital has $149 million in assets under management. – Kelly Thompson

Follow Kelly on Twitter @MMktDoyenne for middle-market financing news.

content
at 2:16pm

Jefferies Finance prices $312.5M CLO; YTD volume now $18.7B

Citigroup last week priced a $312.49 million CLO for Jefferies Finance, according to sources. The deal, which will invest in both broadly syndicated and middle-market loans, is structured as follows:

The 11-year deal has a three-year reinvestment period.

Jefferies Finance will manage the CLO and Babson Capital Management will act as a sub-advisor, Moody’s said in a July 11 report.

JFIN is one of two CLOs to price so far this month; the other is from GSO/Blackstone Debt Funds Management. Including these two deals, year-to-date issuance rises to about $18.7 billion. – Kerry Kantin

content
at 11:33am

GLC Advisors hires Thompson and Swindell from FBR Capital Markets

GLC Advisors has hired Paul Thompson and Robert Swindell as senior managing directors from FBR Capital Markets, according to an announcement today. They’ll advise on agriculture, logistics, consumer products and technology industries and will also support restructuring and investment practices, according to the release.

Both were senior managing directors at FBR, and before that from Watch Hill Partners. Thompson is also an alum of Donaldson Lufkin & Jenrette, while Swindell was CEO of Civitas Group after working for Lehman Brothers for 17 years.

GLC is a subsidiary of Global Leveraged Capital, a private advisory and investment firm focused on the middle market. GLC has recently advised in several restructuring situations covered by LCD, including representing bondholders of Chukchansi Economic Development Authority and the mezzanine group of Wastequip. – Staff reports

content
at 3:36pm

Middle market: Mezzanine shops look to co-equity to fortify returns

With more capital than deals floating around in 2012, mezzanine investors are stumbling over themselves to book business. Mezz players also are facing heavy competition from banks, which are underwriting senior stretch once again, as well as unitranche providers, which like to tout their easy “one-stop shop” approach.

As a result, mezzanine shops have watched the free equity that comes with warrants melt away as sponsors pit investors against each other. Instead, mezzanine shops are juicing their returns with co-equity and are ponying up a portion of the check upfront.

“Warrants have not been around for a while, at least in sponsored deals,” said one Chicago-based banker. “Most mezz guys try to get 10-15% of the mezzanine amount in an equity co-invest,” he notes, or about $2-3 million of co-invest on a $20 million mezzanine ticket.

The co-equity component – which sponsors prefer because it doesn’t dilute their ownership stake – helps prop up spread compression in the mezzanine market as these lenders battle competition from all sides. That includes even the high-yield market, where last week Norbord, a business with $53 million in EBITDA, printed $165 million of senior secured notes at 6.25%. Granted, Norbord is an atypical bond deal, as the notes have a short three-year maturity.

Lenders say mezzanine spreads have fallen below 14% all-in, leaving funds little room for write-offs or principal loss. Prior to the senior lending boom in 2005-2007, mezzanine rates hovered closer to 18-20% all-in.

CEPRES, a European provider of private equity data, this month reports that 2011 pricing for mezzanine debt in North America averaged 11% cash-pay and 3% pay-in-kind, or 14% all-in, based on nearly 3,400 transactions. In 2010, the average was 10% cash-pay/3% PIK, the same level seen in 2007, the firm reports.

By comparison, pricing for middle-market institutional loans currently averages 7.8% all-in (L+585, 1.38% LIBOR floor, 98.5 issue price), with second-lien pricing ending 2011 at about 11.8%, according to LCD. Unitranche debt is being pitched at 8.5-11%, depending on the deal, bankers say.

“Mezz performs best in an active frothy market as a good replacement for equity,” notes another banker at a Chicago-based shop. But when deal flow can’t keep up with appetite, senior lenders end up gobbling more of the pie.

In May, senior debt accounted for the bulk of middle-market financing tracked by LCD, with senior leverage averaging 4x against a 4.3x total multiple. Compare that to a more difficult market two years ago, in May 2010, when senior lenders were extending just 3x leverage, on average, against a total multiple of 3.6x.

Despite recent stock volatility that has lifted spreads, market tone generally is viewed as strong. “The high-yield market is robust, and plenty of lenders have capital,” says one mezzanine lender.

Bankers say some new business is being pitched within the realm of 5x. In fact, the LBO financing for Henry Co. that launched last week features first-lien leverage of 3.6x and a total multiple of 4.9x through a second-lien term loan, according to sources. The second-lien is talked at L+900, with a 1.75% LIBOR floor and a to-be-determined OID.

Until liquidity begins to dry up again, mezz investors can expect to keep battling competitors from all angles at tight rates. – Kelly Thompson

content
at 1:58pm

Investcorp readies leveraged loan backing Archway Marketing LBO

GE Capital and ING have set a bank meeting for Wednesday to launch syndication of a $175 million senior secured loan that will back the purchase of Archway Marketing Services by Investcorp, according to sources.

Accounts are being told the unrated deal will launch as a $30 million, five-year revolver, a $35 million, six-year delayed-draw term loan that has a three-year draw period, and a $110 million, six-year term loan that will amortize at 1% annually.

Official price talk has yet to circulate the market, sources noted.

Investcorp is buying the business from Tailwind Capital, Black Canyon and management for an undisclosed sum. As currently structured, leverage will run 3.7x through the senior debt at closing, 5.2x total, according to sources.

The current owners purchased the Rogers, Minn.-based company – a marketing-operations-management provider – in November 2008. Tailwind said it doubled the size of the business in June 2009 with the purchase of Resolve Corp.’s supply-chain-management division. – Kelly Thompson

Follow Kelly on Twitter @MMktDoyenne for middle-market financing news.