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



Albertson’s/Safeway, prepping for IPO, eyes potential refinancing

Albertson’s disclosed in an updated regulatory filing tied to its proposed initial public offering that it has held preliminary discussions with potential lenders, financial intermediaries, and advisors about a refinancing of its loans. The refinancing would include a new $4 billion asset-based loan agreement, new term debt, and new senior unsecured notes, according to the filing.

Underwriters on the IPO include Goldman Sachs, Bank of America Merrill Lynch, Citigroup, Morgan Stanley, Deutsche Bank, Credit Suisse, Barclays, Lazard, Guggenheim, Jefferies, RBC, Wells Fargo, BMO Capital Markets, SunTrust Robinson Humphrey, and others.

Albertson’s intend to use the net proceeds from the equity offering to repay all amounts outstanding under the new Albertson’s term loan, including $845.7 million of principal, plus accrued and unpaid interest; to redeem $243.8 million of ABS/Safeway notes at a redemption price of 107.750%, plus accrued and unpaid interest; to pay fees and expenses; with remaining amounts used to reduce Albertson’s term debt, which totaled $6.084 billion as of June 30.

Last year’s $9 billion merger of Cerberus Capital Management-controlled Albertson’s with Safeway was backed by financing commitments from Credit Suisse, Bank of America Merrill Lynch, Citigroup, Morgan Stanley, Barclays, Deutsche Bank, PNC Bank, US Bank, and SunTrust Robinson Humphrey.

Loan financing for the deal included a $3.609 billion, seven-year B-4 term loan (L+450, 1% LIBOR floor), that was later increased via a $300 million add-on, and a $950 million, five-year amortizing B-3 term loan (L+400, 1% floor). Both loans included 12 months of 101 soft call protection. – Staff reports


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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Sirius Computer nets B+/B1 ratings as buyout credit launches

Sirius Computer Solutions has drawn ratings of B+/B1 ahead of this morning’s launch by Credit Suisse, Barclays, and Citi of the $655 million first- and second-lien financing backing Kelso & Co.’s roughly $830 million purchase of a majority stake in the business. The first-lien loan is rated B+/Ba3, with a 3H recovery rating, while the second-lien debt has drawn B-/B3 ratings, with a 6 recovery rating.

The financing includes a $445 million, seven-year first-lien term loan; a $150 million, eight-year second-lien term loan; and a $60 million revolver. The term loans will be covenant-lite.

Kelso is acquiring a majority stake in the IT-services provider from Thoma Bravo, which acquired a controlling stake in the business in 2006, and Harvey Najim, the company’s founder. Closing is expected in the fourth quarter.

The transaction includes $261 million of sponsor-contributed and roll-over equity.

Sirius last tapped the loan market in April via Wells Fargo for a $35 million add-on, proceeds of which were earmarked to fund an acquisition. Alongside the add-on, the issuer repriced its 2012 vintage term loan, originally $260 million, to L+525, with a 1% floor, from L+575, with a 1.25% floor.

San Antonio, Texas-based Sirius provides customers with hardware, software, and services that support data storage, network security, network access, application development, and web hosting. – Chris Donnelly/Kerry Kantin


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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IGeneX receives unitranche debt for management buyout of company

IGeneX received unitranche debt and preferred equity from Balance Point Capital Partners and 4C Capital. Proceeds backed a management buyout of the company.

IGeneX, based in Palo Alto, Calif., provides clinical testing and laboratory services for Lyme disease and other tick-borne illnesses.

Balance Point Capital Partners invests in mezzanine and unitranche debt, as well as equity capital, of U.S. lower middle market companies generating annual EBITDA of $2-$25 million.

Among the firm’s investments are game and toymaker Patch Products, baby care products company HALO Innovations, gourmet food product company Food Evolution; and radio broadcasters Digity Media and Connoisseur Media. – Abby Latour

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Battle heats up over management fees from TICC Capital

A fight is heating up over lucrative management fees from TICC Capital.

TICC Capital is a business development company that invests in debt through syndicated bank loans and debt and equity of CLOs. It is managed by TICC Management, which collects a 2% base fee annually, as well as an incentive fee. As of June 30, $5.3 million was due to TICC Management in advisory fees for the quarter, in line with the fee for the same quarter a year earlier.

In early August, TICC Capital announced an affiliate of Benefit Street Partners would acquire TICC Management. Benefit Street Partners is the credit investment arm of Providence Equity Partners. UBS Investment Bank advised TICC Management on the transaction.

Soon after, NexPoint Advisors submitted a proposal to the board of TICC Capital for a management agreement that would cut advisory fees by an estimated $35 million and include a $10 million investment in TICC Capital shares. NexPoint later sweetened its offer. NexPoint is an affiliate of Highland Capital Management.

Benefit Street Partners followed up with a revised offer, saying the base fee would be cut to 1.5% annually, from 2%, permanently. The offer would include an investment in TICC Capital of at least $20 million through common stock purchases over the next year. Benefit Street Partners would transition TICC Capital’s strategy to private debt investments.

A special committee for TICC Capital’s board of directors unanimously supported the new agreement with Benefit Street, a Sept. 3 statement said.

Now, a new party has entered the fray.

TPG Specialty Lending unveiled a stock-for-stock bid for TICC Capital Corp., saying the offer was superior to the competing proposals from Benefit Street Partners and NexPoint.

Under terms of the offer, released today, TICC stockholders would receive common stock of TPG Specialty Lending equivalent to $7.50 in value, or a 20% premium to TICC Capital’s Sept. 15, 2015, closing stock price. TPG Specialty Lending shares, which trade on NYSE under the ticker symbol TSLX, eased $0.12 today, to $17.23, while the broader market indices were higher.

TPG Specialty Lending publicized its offer today, after proposing the offer privately to the special committee of TICC Capital’s board. TPG Specialty Lending added that the TICC special committee had rejected the offer.

But TPG Specialty Lending has urged the board to reconsider, arguing the transaction would result in long-term value for both shares, in addition to the immediate premium for TICC stockholders.

“TSLX remains fully committed to pursuing this transaction for the benefit of all stockholders and urges the special committee to enter into constructive discussions with TSLX pursuant to its fiduciary duties,” TPG Specialty Lending said in a statement today.

At a special meeting of TICC shareholders on Oct. 27, TPG Specialty Lending said it intends to solicit support to block the Benefit Street Partners’ proposal.

“We agree with NexPoint that stockholders should reject the Benefit Street Partners proposal. However, the NexPoint proposal is equally flawed as both transactions provide returns only for external managers and offer no immediate value to stockholders,” TPG Specialty Lending said in a statement.

Shares in TICC Capital closed higher today, at $6.87, up nearly 10%, in firmer market conditions. Still, they are trading at a discount to net asset value, which was $8.60 per share as of June 30. – Abby Latour

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International Medical Group to be acquired by ABRY Partners

ABRY Partners has agreed to buy insurance firm International Medical Group from existing sponsors Altaris Capital Partners and Galen Partners, according to the company. Details of the transaction were not disclosed.

Altaris and Galen have controlled the company since 2012.

International Medical Group, founded in 1990, provides international medical insurance and travel insurance. The company is headquartered in Indianapolis, Ind., and has a European subsidiary that is based in the U.K. – Jon Hemingway


Sundial Brands nets financing to back Bain Capital investment

Sole lead Goldman Sachs is arranging the debt financing that will back the acquisition of a minority stake in Sundial Brands by Bain Capital Private Equity, according to sources. Further details of the transaction were not available.

The private equity firm announced the deal last week. Sundial will remain majority family-owned and operated, and founder and CEO Richelieu Dennis will continue to lead the company, according to the firm.

Sundial Brands, based in Amityville, N.Y., is a manufacturer of natural skin care and hair care products. The company’s brands include SheaMoisture and Nubian Heritage. – Jon Hemingway