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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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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Leveraged loans: NewStar acquires Feingold O’Keeffe Capital, adding $2.3B to AUM

NewStar Financial has agreed to acquire Feingold O’Keeffe Capital, a private alternative asset management firm based in Boston, Massachusetts. The acquisition will add roughly $2.3 billion to NewStar’s assets under management, increasing total pro forma AUM to approximately $6.4 billion.

FOC’s investment platform and capabilities complement NewStar’s existing middle market direct lending strategies, which are offered through three credit funds with roughly $1 billion of managed assets. It also builds on NewStar’s existing asset management capabilities, adding an established, diversified investment platform with fee-based accounts managed across a range of CLO, hedge fund, separate account, and retail fund products.

The platform will be co-led by FOC co-founders Andrea Feingold and Ian O’Keeffe. FOC will operate as NewStar Capital, a wholly-owned subsidiary of NewStar Financial, and will continue to be based in Boston.

NewStar will retain FOC’s investment team and support staff to manage existing accounts, and intends to expand the platform through organic growth in existing accounts and new fund formation with CLO risk-retention solutions provided or arranged by NewStar.

Since forming a strategic relationship with Blackstone’s GSO Capital in the fourth quarter of last year, NewStar has focused on expanding its asset management platform by launching new managed funds and increasing its investment activity. This transaction is the company’s first acquisition of an investment manager.

FOC Partners was established in 2001 by Feingold, former co-head of PIMCO’s High Yield Group, and O’Keeffe, former PIMCO head of high yield trading with a focus on credit risk assets including senior loans, high yield bonds, and stressed/distressed debt. The firm is a registered investment adviser and currently manages six CLOs backed by broadly syndicated loans, as well as various separate accounts and retail funds employing long-only strategies focused on leveraged finance. FOC also manages two hedge fund strategies.

The transaction is expected to close in the fourth quarter, subject to customary closing conditions, and be accretive to earnings per share in Q1 2016. – Staff reports



Leveraged loans: Middle market lender Twin Brook expands to Chicago

Middle market lender Twin Brook Capital Partners opened an office in Chicago and added two new hires to underwrite loans.

Betsy Booth and Michael LaBelle, joined the firm in August. They will focus on middle market companies with private equity sponsors.

Booth most recently worked at Ares Capital Management, where she was a senior associate. Prior to Ares, she worked at Madison Capital Funding as an assistant vice president of underwriting. She also worked at MB Financial Bank.

LaBelle was most recently at National Express Corporation, where he was a director in corporate development. He also worked at Madison Capital Funding as assistant vice president of underwriting, and at William Blair & Company.

Twin Brook Capital Partners is the middle market direct lending subsidiary of Angelo, Gordon & Co. The lender targets companies generating EBITDA of $3 million to $50 million for cash-flow based financing. The company is led by Trevor Clark and Christopher Williams, founders of Madison Capital Funding. – Abby Latour

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Natixis hires CLO banker Alex Zilberman from Credit Suisse

Natixis today announced the hiring of Alex Zilberman as co-head of U.S. CLO and Structured Credit within its Global Structured Credit and Solutions (GSCS) group. Zilberman would manage the team alongside Michael Hopson. Both Zilberman and Hopson will report to Hank Sandlass, the deputy head of GSCS.

Zilberman was previously at Credit Suisse in a number of roles involving CLO origination, advisory, and structured credit sales. – Andrew Park

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Cowen forms special situations group; announces new hires

Cowen and Company has established a Special Situations product group that will broaden its investment banking business to include restructuring and recapitalization advisory services, the company said in a statement on Wednesday.

Lorie Beers joins the firm as Managing Director and Head of Special Situations. Beers, who has 28 years of experience, including, most recently, as Head of Restructuring at StormHarbour Securities, will be supported by Jeff Knopping – a Managing Director within the team – and new hire Randy Lederman. Prior to joining Cowen in 2014, Knopping was a Managing Director at KCAP Financial where he led the origination and markets team. Lederman, who joins the firm as a Director, was previously at StormHarbour Securities where he served as Managing Director in the energy capital markets group.

The group will be based in New York and will report to Kevin Raidy, Head of Investment Banking.

“We believe these capabilities will be highly relevant in the current market environment, particularly in certain industry sectors such as energy and retail/consumer products, and complement our existing debt and equity capital markets capabilities,” said Raidy.

Cowen Group provides alternative asset management, investment banking, research, and sales and trading services through its two business segments: Ramius and its affiliates make up the company’s alternative investment segment, while Cowen and Company and its affiliates make up the company’s broker-dealer segment. – Rachelle Kakouris

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York joins direct lending at Ares from Bank of America Merrill Lynch

Chris York has joined Ares Management in its U.S. Direct Lending Group.

York will help expand the capital markets team as the company seeks to underwrite and syndicate larger U.S. direct lending transactions. He will be based in New York. He joins as a principal.

Last month, Ares Capital syndicated an $800 million loan financing for American Seafoods Group. The deal was the latest example of a non-regulated arranger stepping in to capture business typically in the realm of large banks.

York joins from Bank of America Merrill Lynch where he spent 13 years in various leveraged finance roles. Most recently, he worked on the bank’s par loan sales desk.

Ares Capital is a BDC that trades on the Nasdaq under the symbol ARCC and invests in debt and equity of private middle market companies. – Abby Latour

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American Apparel raises going concern warning as losses deepen

Embattled clothing retailer American Apparel issued a going concern warning on Monday, stating once again that it may not have enough liquidity to continue its operations for the next 12 months amid deepening losses and negative cash flows.

American Apparel said in an SEC filing after yesterday’s close that it had reached an agreement with a group of lenders, led by Standard General, to replace its $50 million credit facility with a $90 million asset-based revolver, maturing April 4, 2018. Wilmington Trust replaces Capital One as the administrative agent, the filing said.

Despite the cash infusion, American Apparel further warned that if it is unsuccessful in addressing its near-term liquidity needs or in adequately restructuring its obligations outside of court, it “may need to seek protection from creditors in a proceeding under Title 11” of the US bankruptcy code.

Note the company has a $13 million interest payment on its 15% first-lien 2020 bonds in October.

Shares in the name fell 4% to 14 cents as at mid-morning on Tuesday, having lost more than 85% this year.

As reported, American Apparel said it had been in ongoing discussions with Capital One regarding a potential waiver in an effort to avoid a potential default, and as a result of these discussions, was unable to file its second quarter 2015 10-Q filing before the regulatory deadline.

According to yesterday’s filing, the company was not in compliance with the minimum fixed charge coverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2015 through June 30, 2015 covenant reference period, its coverage ratio was 0.07 to 1.00 as compared with the covenant minimum of 0.33 to 1.00, and its adjusted EBITDA was $4,110 compared with the covenant minimum of $7,350. The covenant violations were waived under the Wilmington Trust Credit Facility.

The retailer on Monday confirmed its second-quarter results, released on a preliminary basis last week. As reported, second-quarter net losses jumped 20% to $19.4 million, or $0.11 per share, from a loss of $16.2 million, or $0.09 per share in the year-ago period. This is the company’s 10th consecutive quarterly loss.

Revenue fell approximately 17% from the year-ago period, to $134 million.

Adjusted EBITDA for the three months ended June 30, 2015 was $4.1 million, versus $15.9 million for the same period in 2014. As of Aug. 11, 2015, American Apparel had $11,207 in cash.

As reported, the company said it has begun discussions to analyze “potential strategic alternatives,” which may include refinancing or new capital raising transactions, amendments to or restructuring of its existing debt, or other restructuring and recapitalization transactions.

American Apparel is rated CCC- by Standard & Poor’s, with negative outlook. Its 13% senior secured notes due 2020 are rated CC, with a recovery rating of 5. Moody’s last week downgraded the company to Caa3 from Caa2, and placed the company under review for downgrade. – Rachelle Kakouris


ICG taps Goodman for U.S. private debt investment team

Intermediate Capital Group announced today that it has added Adam Goodman to its U.S. private debt investment team as a managing director, according to the firm.

Goodman joins from MetLife where he was head of mezzanine investments and a portfolio manager responsible for direct private debt, mezzanine, and credit fund investments. Prior to that he was at Allied Capital where he sourced, structured, and executed investments across the capital structure.

Goodman joins an existing U.S. investment team that includes Salvatore Gentile, head of U.S. Operations, as well as Brian Spenner and Seth Katzenstein, who both joined the firm in 2013. In all, the U.S. credit platform has 27 employees and manages $2.7 billion across its private and syndicated debt strategies, according to the firm. – Staff Reports


Ares Management announces merger plan with Kayne Anderson

Alternative asset manager Ares Management announced today that it is merging with energy specialist Kayne Anderson Capital Advisors. The combination will be renamed Ares Kayne Management. The firms had a combined $113 billion of assets under management as of March 31.

Total consideration is $2.55 billion. Ares plans to pay around $1.8 billion with partnership units and the $750 million balance in cash, which will be funded with new debt, according to a presentation. The deal is expected to close around Jan. 1, 2016, subject to regulatory approvals.

The combined business will invest across five groups: tradable credit, direct lending, energy, private equity, and real estate. However, the two companies will continue to manage their existing funds and operate under existing brand names, according to a statement.

Ares Kayne will have roughly 450 investment professionals in more than 20 offices globally. Kayne Anderson alone has around 110 investment professionals in eight U.S. offices managing investments in energy and energy infrastructure, specialty real estate, middle market credit and growth private equity. Substantially all non-energy personnel will join Ares’ existing private equity, real estate,and direct lending groups, the firms said.

Both Richard Kayne, the founder and chairman of Kayne Anderson, and Ares chairman and CEO Tony Ressler will serve as co-chairmen of the new entity. Kayne’s president and CEO Robert Sinnott will become chairman of a newly formed energy group at Ares Kayne. Sinnott and Kayne’s Kevin McCarthy will join the board. Sinnott, McCarthy, and Al Rabil will join the management committee. Ressler, Michael Arougheti, and Michael McFerran will remain in their respective roles as CEO, President, and CFO. – Jon Hemingway