Debt multiples at middle market companies have retreated to a 2.5-year low following last year’s comb-through by regulators for compliance with stricter lending guidelines.
For the first half of 2015, total leverage averaged 4.6x among companies generating $50 million or less of annual EBITDA, down from a record 5x for 2014, according to LCD. Senior multiples have fallen more significantly, to 4.3x, from 4.9x last year.
Along with the tighter leverage, fixed-charge ratios are better cushioned, increasing for the first time in four years. For the first half, the average fixed-charge ratio was 3.2x. The ratio was even better in the second quarter, at 3.8x, according to LCD.
While banks have reined in their underwriting overall, they haven’t thrown in the towel completely. Several aggressive transactions in 2015 have been led by banks that deem the relationship worthy.
In recent weeks, Barclays, Angel Island Capital, and Jefferies launched a debt-heavy transaction for Riddlesburg, Pa.-based PetroChoice, a distributor of vehicle lubricants. Barclays is subject to the lending guidelines, but it has teamed up with Angel Island Capital and Jefferies, which are not constricted by the same set of rules.
The financing is covenant-lite and includes a $235 million, seven-year first-lien term loan that’s talked at L+375-400, with a 1% LIBOR floor, offered at 99, with six months of 101 soft call protection. The first-lien loan adjoins a $90 million, eight-year second-lien term loan talked at L+775-800, with a 1% floor, offered at 98.5, with hard calls of 102 and 101 in years one and two, respectively. Proceeds back the buyout of the company by Golden Gate Capital. Leverage multiples are 4.5x through the first-lien and 6.2x total. Commitments are due Thursday, Aug. 13. Agencies assigned B/B2 issuer ratings.
At roughly $52 million in annual EBITDA, PetroChoice sits at the larger end of the middle market spectrum and would slip just outside LCD’s traditional $50 million-and-under cutoff. Through June 30, 36 companies were boxed in that traditional category and generated average EBITDA of $34.4 million, down from $39.2 million in the first half of last year. LCD’s pool tends to skew toward the larger end of the market where banks still play a significant role in syndicated transactions.
In June, SunTrust extended 4.5x senior and 6.6x total multiples to GI Partners to back the buyout of MRI Software, a known name in the market that operates in a favorite sector with long-term contracts and strong renewal rates. It also helped that GI wrote a $216 million equity check, for about half of the pro forma capital structure. The deal’s $155 million, six-year term loan closed at original talk of L+425, but the issue price was tightened to 99.5, from 99 (with a 1% floor). The company drew a B issuer rating from Standard & Poor’s. Vista Equity is the seller. A $70 million, seven-year second-lien tranche cleared at original talk of L+800 at 98.5, also with a 1% floor.
In the shadow banking community, finance companies say that leverage has not shown any signs of deflating. In fact, pitches are aggressive as ever, with sponsors pushing hard for multiples in the 6x area on unitranche loans, or 4.5x by 6.5x on first-/second-lien structures that a year ago would have been in the 5x range, managers say. Even 7x multiples have popped up on a few outer-limit pitches recently. Fincos don’t cave on every deal, but the pressure is intense to win mandates on generous amounts of debt, these lenders say.
Ares Capital Corp. (Nasdaq: ARCC), the largest business development corporation by several measures, including assets under management with a portfolio of roughly $8.6 billion at fair value, has boosted portfolio leverage over the last year. Average net leverage through the second quarter was 5.1x, up from 4.6x in the same period last year, the company reported this week. Moreover, the average interest coverage ratio dropped to 2.8x, from 3x. Average EBITDA for the portfolio is $59.6 million, up from $54 million in the second quarter of last year.
Average net leverage within ARCC’s separate unitranche portfolio, which totals $10 billion in principal amount, ticked up to 4.9x after holding steady at 4.8x throughout 2014. Interest coverage on these investments maintained a 3.6x ratio from the two previous quarters and improved from 3.4x in the year-ago period. Average EBITDA among unitranche issuers is $53.7 million.
Meanwhile, average leverage for Franklin Square Investment Corp.’s (NYSE: FSIC) $436 million portfolio ticked up to 4.8x from 4.6x during the six-month period from October 2014 to March 31, 2015. Average EBITDA was $50.7 million at the end of March. FSIC’s second-quarter results are due out Aug. 11.
As summer turns to fall, the market expects little to change. Banks will try to compete on pricing, while fincos will use debt to their advantage. In either case, limited supply will continue to leave both groups chasing too few mandates. – Kelly Thompson
Follow Kelly on Twitter @MMktDoyenne for Middle market financing news