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Solar Capital BDC – PIMCO joint venture to focus on unitranche middle-market loans

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 OutdoorWireCoGlobal 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 SciencesAsurionConvergeOne, 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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Solar Senior Capital sets up middle-market ventures with Voya, PIMCO

solarSolar Senior Capital and Voya Investment Management have unveiled plans for a joint venture to lend to private equity-owned and entrepreneur-owned middle-market companies.

In a press release yesterday, Solar Senior Capital said it has committed $50 million to the first-lien loan program, while Voya is committing $7.25 million. The joint venture will primarily invest in senior secured term loans.

Solar Senior Capital and Voya plan to seek third-party financing to leverage the entity to 2x debt-to-equity, according to yesterday’s statement. Solar Senior Capital and Voya expect to begin funding the portfolio with new investments before year-end.

The announcement comes on the heels of news last week that Solar Senior entered an agreement with an affiliate of a PIMCO fund. That joint venture will invest in middle-market senior secured unitranche loans sourced by the origination platform used by Solar Senior Capital. Initial funding commitments will total $600 million, a Sept. 2 SEC filing said.

The PIMCO joint venture entity, referred to as a senior secured unitranche loan program, will initially comprise equity commitments of $300 million from Solar Senior 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 program.

Solar Senior Capital and the PIMCO affiliate are similarly in advanced talks with a third-party senior debt provider over financing, targeting leverage of 2x debt-to-equity for the portfolio.

Solar Senior Capital, listed on Nasdaq as SUNS, is a business development company focused on leveraged, middle-market companies. Voya Investment Management is 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 84% in senior secured loans. Among them were loans backing Aegis Toxicology Sciences, Asurion, ConvergeOne, and Genex. – Abby Latour

 

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Metis, backed by Garrison Investment Group, joins swelling ranks of lenders to middle market

Garrison_Investment_Group_Lp_1089927A new player has joined the growing ranks of lenders to smaller companies, Metis Commercial Finance. The firm will target loans of $1-20 million to lower middle-market companies generating annual revenue of $10-100 million.

Metis is backed by middle-market credit and asset-based investor, Garrison Investment Group.

James Irwin, founder of Meridian Healthcare Finance and MC Healthcare Finance, is CEO of Metis, which will have offices in San Diego and Boston. Dan O’Rourke, a founder of Salus Capital Partners and NewAlliance Commercial Finance, is chief credit officer.

“Lending to the upper middle market has come back to where it was pre-credit crisis. Lending to the lower middle market hasn’t come back nearly as much,” said Irwin. “That’s where there’s opportunity. It’s underfunded and under-banked.”

Metis’ product offering is wider than that of many specialty lenders, offering a range of debt structures, from asset-based revolvers, term loans based on cash flow and other assets, to unitranche debt, as companies grow or weather tough times.

Metis will be national in scope, instead of regionally focused, like many lenders to middle-market companies, and lend across sectors.

“Banks today are prohibitive and not cost-effective in meeting the needs of these borrowers,” said O’Rourke. “As a non-bank you have much greater flexibility.”

The management team includes Bob Seidenberger, who will head sales and marketing at Metis and was previously vice president, specialty finance at BofI Federal Bank and a director at MC Healthcare Finance. Mike Pestrak, previously a portfolio manager at Celtic Capital, will be senior vice president of underwriting at Metis. – Abby Latour

 

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Golub Capital team adds two members for middle-market private equity lending

imgresGolub Capital has expanded its lending team with two hires who will focus on deals to upper middle-market private equity sponsors, a business area that the lender expects to increase in part due to changing bank regulations.

Hyun Chang joined Golub from J.P. Morgan Securities, where he was an executive director in the financial sponsors group. Michael Meagher joined from Deutsche Bank Securities, where he was a director in the financial sponsors group. They both started in August.

The two join a team of more than 60 and will report to Andy Steuerman, who is head of middle-market lending at Golub. Chang and Meagher will focus on the upper middle market, defined as companies that generate annual EBITDA of $40-80 million.

Golub defines its core middle market as companies generating annual revenue of $15-50 million and the lower middle market as those with EBITDA of $5-15 million.

Steuerman said tougher regulations for banks will result in more demand for lending to the upper middle market.

“It’s demand-driven,” Steuerman said of the hires. “We’ve seen some of the largest private equity firms decide to go back into the upper middle market.” – Abby Latour

 

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Fifth Street Management closes $305M Senior Loan Fund II

logo-fifth-street-regFifth Street Management has closed its Fifth Street Senior Loan Fund II (SLF II), a $305 million multi-tranche financing facility that will invest in senior secured loans to middle-market companies, according to a statement from the firm.

SLF II’s financing was provided via a three-tranche credit facility with ratings from DBRS ranging from AAA(sf) through BBB(sf). Natixis served as sole lead arranger and placement agent.

Portfolio assets will be sourced through Fifth Street’s middle-market origination platform.

Fifth Street Senior Loan Fund I is a $210 million fund that closed in February 2014.

Fifth Street Management is an alternative asset manager that manages a number of private funds and is the SEC-registered investment adviser of publicly-traded business development companies Fifth Street Finance Corp. and Fifth Street Senior Floating Rate Corp., which trade on the NASDAQ under the tickers FSC and FSFR respectively. – Jon Hemingway

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Middle Market 2Q Snapshot: Leverage spikes above large caps again

Note: The following story is excerpted from LCD’s second-quarter Middle-Market Review. The full report is available to Research subscribers. Contact Marc Auerbach to learn more: (212) 438-2703.

Amid growing demand from non-banks in the second quarter, middle-market leverage climbed beyond large-cap averages for the second time in the last 12 months. Total debt for middle-market transactions averaged a record 5.2x for the quarter, according to LCD. Senior debt averaged 5.1x for the quarter and 4.8x for the first half.

Helping prop up debt multiples is the new guard of middle-market lenders. Exchange-traded BDCs and middle-market CLOs collectively raised roughly $4 billion in new issuance during the second quarter, and $7.4 billion for the first half. And that doesn’t include private BDCs, middle-market buckets of large-cap CLOs, or separate managed accounts that arrangers are raising on the sidelines. (Non-listed BDCs file quarterly and have yet to disclose their fundraising efforts for the second quarter.)

LCD subscribers can click here for full story, analysis, and the following chart:

  • Cov-lite share of middle market institutional volume


– Kelly Thompson

For this article, LCD defines middle-market issuers as companies that generate EBITDA of up to $50 million, except where noted.

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KeyCorp buys middle market investment bank Pacific Crest

keyIn a drive to become the leading middle market corporate and investment bank, KeyCorp said it acquired Pacific Crest Securities.

Pacific Crest Securities, which is a technology-focused investment bank and capital markets firm, will become part of KeyBanc Capital Markets. The transaction is expected to close in the third quarter if regulators approve the deal.

Pacific Crest Securities, based in Portland, Oregon, employs 170 and has expertise in internet and digital media, software and systems, communications, semiconductors, and clean technology. – Abby Latour

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Lagunitas Brewery nets $20M credit facility from GE Capital

GE Capital, Corporate Finance provided a $20 million credit facility to Lagunitas Brewery.

The facility will be used to finance equipment leases for a new brewery in Chicago. The company is opening a 600,000-barrel capacity brewery in the city’s Douglas Park neighborhood.

The company also has a $20 million term loan from Portland-based Umpqua Bank.

Lagunitas, based in Petaluma, Calif., is a craft brewer. – Abby Latour

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Middle-market lender Monroe fires partner/managing director for confidentiality breach

MonroeCapitalMiddle-market lender Monroe Capital has terminated a managing director for allegedly stealing proprietary information and siphoning-off trade secrets to a new firm, Breakaway Capital.

Monroe Capital said the firm terminated former partner Warren Woo, effective last week, for violating the company’s policies and use of information systems.

A complaint filed on June 19 by Monroe Capital with the Circuit Court of Cook County, Ill., alleged that for more than 18 months, Woo forwarded hundreds of emails to another email at Breakaway Capital. He then deleted the forwarded emails from his sent-items folder at Monroe Capital to avoid detection.

Some of the emails instructed recipients to communicate with Woo in the future at Breakaway Capital only.

“Woo and his new company, acting in concert with his new partner and Breakaway Capital co-founder, Michael Connolly, arrogated to themselves critical business opportunities which belonged to Monroe Capital and which Woo had a clear duty to consider the exploit for Monroe Capital and not for his new company and new partners,” the complaint said.

Included in the 308 emails Woo forwarded, as well as 157 attachments, were new-business prospects, individual deal structures and pricing memos, internal underwriting analysis, and third-party analysis that Monroe Capital paid for as part of new-business pitches.

Monroe Capital uncovered the scheme after the firm received an SEC subpoena requesting information about Breakaway Capital. As a result of the subpoena, Monroe looked into Woo’s email.

“The investigation revealed that not only did Woo improperly transfer confidential and proprietary company and customer information and trade secrets, but that he actively intends to use this information to compete with Monroe Capital by taking deal source leads generated by Monroe Capital and made, or attempted to make, them his own for his benefit and that of Breakaway Capital.”

“Monroe Capital has suffered irreparable harm as a result of Woo’s unlawful conduct,” the complaint said.

Neither Warren Woo nor Michael Connolly returned calls or emails seeking comment. Woo and Connolly founded Breakaway Capital as a limited partnership.

Breakaway Capital, based in Los Angeles, is a private investment firm with $50 million of committed capital, seeking debt and structured equity investments in small and middle-market businesses across a variety of industries, the company’s website said. The company was formed in March 2014, the complaint said.

Chicago-based Monroe Capital, established in 2004, provides debt and equity co-investments to middle-market companies in North America, including unitranche financings, acquisition facilities, mezzanine debt and second-lien loans. – Abby Latour

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Europe: Beechbrook Capital raises €110M for Mezzanine II fund; hires Deregowski, Moore

beechbrookSpecialist lender Beechbrook Capital has raised €110 million after a second close for its Beechbrook Mezzanine II fund, paving the way for it to lend more to small and medium-size (SME) businesses.

Two new investors joined the fund, while three existing investors increased their commitments, the London-based fund manager said today. With several further commitments expected, Beechbrook targets a final close in late June.

Additionally, Beechbrook has hired two new associates: David Deregowski, previously of Lincoln International, and Adam Moore, formerly with Ares.  Further appointments are planned for the second half of the year.

Beechbrook is taking advantage of direct lending opportunities in the lower middle market due to the continuing dearth of funding available from banks in this segment. Founded in 2008 by Nick Fenn and Paul Shea, the lender currently has over €200 million of assets under management and invests in SME businesses across various industries in the U.K. and Northern Europe.

Its Mezzanine II fund has made five investments in total, with two more lined up before its final close in June. It fund recently provided a mezzanine loan to support the buyout of Italian-themed restaurant chain Gusto by Palatine Private Equity and management. It also provided mezzanine financing to support the buyout of Americana, owner of the clothing brand Bench, by Emeram Capital Partners. – Staff reports