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Versa Media Capital nets $100M financing from Crayhill Capital

Versa Media Capital received a $100 million financing facility from Crayhill Capital Management.

Versa Media Capital is a newly formed company that will provide bridge financing for independent film and television production, as well as mezzanine, gap, and tax credit loans. The team expects to structure and close financing for 15–20 projects per year.

The company was founded by Jeff Geoffray, Jeffrey Konvitz, and Daniel Rainey.

Geoffray co-founded film financing company Blue Rider Finance, which underwrote and financed over 70 transactions on films with over $700 million in production costs. Konvitz is an entertainment attorney. Rainey is a private equity investor and attorney.

New York–based Crayhill Capital Management is an alternative-asset-management firm. — Abby Latour

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Ares Capital grows even bigger with $3.4B American Capital purchase

Two of the largest listed BDCs are merging to form a middle market lending behemoth that will have $13 billion in investments (at fair value). The largest, Ares Capital (ticker: ARCC), announced yesterday that it’s buying American Capital (ticker: ACAS) for $3.4 billion.

The purchase will put even more miles between ARCC and its nearest competitor, now Prospect Capital (ticker: PSEC), which has $6.2 billion in assets against ARCC’s $9.3 billion. The ACAS portfolio will give ARCC another $4.7 billion in investments and expand the number of portfolio companies to 385 from 220.

With the purchase, ARCC will gain scale and flexibility to underwrite larger commitments to compete against traditional banks. Last year’s financing for American Seafoods Group whetted ARCC’s appetite for bigger names. After all, bigger deals generate bigger underwriting and distribution fees. ARCC underwrote an $800 million loan for American Seafoods, snagging a mandate that typically would’ve gone to large banks.

ARCC management yesterday said that it wants the ability to extend commitments of $500 million to $1 billion for any one transaction, with the aim of holding $250 million, whereas before ARCC would go as large as $300 million, with the aim of holding $100 million.

The ACAS purchase also will give ARCC more breathing room under its 30% non-qualifying bucket to ramp its new joint-venture fund with Varagon. The Varagon platform is replacing ARCC’s joint-venture with GE Capital, which began to wind down last year in the wake of GE Capital asset sales.

The boards of directors of both companies have unanimously approved the acquisition.

The purchase requires shareholder approvals and is contingent on the $562 million sale of ACAS’s mortgage unit to American Capital Agency (ticker: AGNC) in a separate transaction.

Elliott Management, holder of a 14.4% interest in American Capital, strongly supports the transactions and will vote its shares in favor.

Ares Management agreed to an income-based fee waiver of up to $100 million for the first ten quarters after closing.

The combined company will remain externally managed by Ares Capital Management LLC, and all current Ares Capital officers and directors will remain in their current roles.

ACAS will continue with planned asset sales ahead of closing, in collaboration with Ares. ACAS hired Goldman Sachs and Credit Suisse in January to vet buyers. Since March 31, ACAS has announced sales of over $550 million in balance sheet investments. In addition to the mortgage business, ACAS is looking to sell its European Capital assets. — Kelly Thompson/Jon Hemingway

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Senate hearing opens discussion on BDC regulation changes

A hearing by the Senate banking committee showed bi-partisan agreement for BDCs as a driver of growth for smaller U.S. companies, but exposed some rifts over whether financial companies should benefit from easier regulation.

BDCs are seeking to reform laws, including allowing more leverage of a 2:1 debt-to-equity ratio, up from the current 1:1 limit. They say the increase would be modest compared to existing levels for other lenders, which can reach 15:1 for banks, and the low-20x ratio for hedge funds.

A handful of BDCs are seeking to raise investment limits in financial companies. They argue that the current regulatory framework, dating from the 1980s when Congress created BDCs, fails to reflect the transformation of the U.S. economy, away from manufacturing.

BDCs stress that they are not seeking any government or taxpayer support.

They are also seeking to ease SEC filing requirements, a change that would streamline offering and registration rules, but not diminish investor protections.

Ares Management President Michael Arougheti told the committee members in a hearing on May 19 that although BDCs vary by scope, they largely agree that regulation is outdated and holding back the industry from more lending from a sector of the U.S. economy responsible for much job creation.

“While the BDC industry has been thriving, we are not capitalized well enough to meet the needs of middle market borrowers that we serve. We could grow more to meet these needs,” Arougheti said.

In response to criticism about expansion of investment to financial services companies, the issue of the 30% limit requires further discussion, Arougheti said.

The legislation under discussion is the result of lengthy bi-partisan collaboration and reflects concern about increased financial services investments, resulting in a prohibition on certain investments, including private equity funds, hedge funds and CLOs, Arougheti added.

“There are many financial services companies that have mandates that are consistent with the policy mandates of a BDC,” Arougheti added.

Senator Elizabeth Warren (D-MA) raised the issue of high management fees of BDCs even in the face of poor shareholder returns. Several BDCs have indeed moved to cut fees in order to better align interests of shareholders and BDC management companies.

She said that Ares’ management and incentive fees have soared, at over 35% annually over the past decade, outpacing shareholder returns of 5%, driving institutional investors away from the sector, and leaving behind vulnerable mom-and-pop retail investors. Arougheti countered by saying reinvestment of dividends needed to be taken into account when calculating returns, and said institutional investors account for 50–60% of shareholders.

Warren said raising the limit of financial services investment to 50%, from 30%, diverts money away from small businesses that need it, while BDCs still reap the tax break used to incentivize small business investment.

“A lot of BDCs focus on small business investments and fill a hole in the market. A lot of companies in Massachusetts and across the country get investment money from BDCs,” said Warren.

“If you really want to have more money to invest, why don’t you lower your high fees and offer better returns to your investors? Then you get more money, and you can go invest it in small businesses,” Warren said.

Brett Palmer, President of the Small Business Investor Alliance (SBIA), said the May 19 hearing, the first major legislative action on BDCs in the Senate, was a step toward a bill that could lead to a new law.

“There is broad agreement that BDCs are filling a critical gap in helping middle market and lower middle market companies grow. There is a road map for getting a BDC bill across the finish line, if not this year, then next,” Palmer said, stressing the goal was this year.

Technically, the hearing record is still open. The Senate banking subcommittee for securities and investment could return with further questions to any of the witnesses. Then, senators can decide what the next stop will be, ranging from no action to introduction of a bill.

Pat Toomey (R-PA) brought up the example of Pittsburgh Glass Works, a company that has benefited from a BDC against a backdrop that has seen banks pulling back from lending to smaller companies following the financial crisis, resulting in a declining number of small businesses from 2009 to 2014.

The windshield manufacturer, a portfolio company of Kohlberg & Co., received $410 million in financing, of which $181 million came from Franklin Square BDCs.

“Business development companies have stepped in to fill that void,” Toomey told the committee hearing. “For Pittsburgh Glass, it was the best financing option available to them.”

FS Investment Corp.’s investment portfolio showed a $68 million L+912 (1% floor) first-lien loan due 2021 as of March 31, an SEC filing showed.

Arougheti cited the example of OTG Management, a borrower of Ares Capital. OTG Management won a contract to build out and operate food and beverage concessions at JetBlue’s terminal at New York airport JFK, but was unable to borrow from traditional senior debt lenders or private equity firms due to its limited operating history.

Ares Capital’s investment in OTG Management included a $24.7 million L+725 first-lien loan due 2017 as of March 31, an SEC filing showed. — Abby Latour

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Another Dividend: CHG Healthcare Readies $990M Leveraged Loan Backing Recap

An arranger group led by Goldman Sachs has scheduled a lender meeting for CHG Healthcare Services on Thursday, May 19, at 10 a.m. EDT.

The issuer is raising a $990 million term loan B, while $300 million of second-lien notes have been privately placed, according to sources. Proceeds back a dividend recapitalization. Additional arrangers are expected to be named shortly.

The healthcare-staffing provider is controlled by Leonard Green & Partners and Ares Management.

CHG roughly a year ago wrapped a $225 million add-on to its covenant-lite first-lien term loan to repay second-lien term debt and fund a small dividend, sources noted. The add-on took first-lien outstandings to roughly $800 million.

The CHG deal is the latest in a relative spurt of recap/dividend loans lately. — Chris Donnelly
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This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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As Investor Sentiment Picks Up, Refinancings/Recap Loans Re-Emerge

leveraged loan refi recap issuance

More evidence that tone is improving in the U.S. leveraged loan market: opportunistic refinancing – including credits backing dividends to private equity sponsors – began to pick up in April (and there’s been at least three recap deals in May, as well).

This chart was taken from LCD’s monthly U.S. Leveraged Loan Technicals analysis, by Kerry Kantin.

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ExamWorks nets financing for buyout by Leonard Green

Bank of America Merrill Lynch, Barclays, and Deutsche Bank have committed to provide the debt financing that will back the roughly $2.2 billion buyout of NYSE-listed ExamWorks by Leonard Green & Partners. Details of the financing are not yet available.

The private equity firm would pay $35.05 per share, according to the company. The acquisition, which was announced this morning, is expected to be completed in the third quarter, subject to shareholder approval and customary closing conditions.

ExamWorks has $500 million outstanding of 5.625% notes due 2023. That deal priced in April 2015 via a Bank of America Merrill Lynch–led bookrunner group with proceeds earmarked to refinance existing debt. The B–/B3 notes changed hands last week in a 103.25-103.5 context, trade data shows.

Atlanta, Ga.–based ExamWorks is a provider of independent medical examinations, peer reviews, bill reviews, Medicare compliance, case-management, and other related services. The company recorded $140.7 million of adjusted EBITDA in 2015 on revenue of $819.6 million. Existing corporate ratings are B+/B2. — Jon Hemingway

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Littlejohn-backed Interior Specialists to acquire HD Supply unit

Interior Specialists, Inc. (ISI), a portfolio company of Littlejohn & Co., has agreed to buy the Interior Solutions unit of Nasdaq-listed HD Supply for an undisclosed amount. The transaction is expected to close in the second quarter, according to the company.

Further details regarding the transaction were not disclosed.

The acquired business, formerly known as Creative Touch Interiors, is a provider of design center management and installation services to homebuilders.

ISI last summer closed on a $74.3 million term loan to support another acquisition and to refinance existing debt. Garrison Investment Group was lead arranger on the transaction, and as of Dec. 31, BDC Garrison Capital was holding $10.2 million of a first-lien term loan due June 2020, priced at L+800 with a 1% floor. PennantPark Investment Corp. ($25.4 million) and PennantPark Floating Rate Capital ($6.8 million) are also in the loan.

Interior Specialists, based in Carlsbad, Calif., is a new construction interior finishing contractor that supplies and installs flooring, cabinetry, countertops, window coverings, and builder construction options, including appliances, to the residential and commercial builder trades. Littlejohn acquired ISI in 2014. — Jon Hemingway

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Mid-States Supply bought by Staple Street in bankruptcy court sale

Middle-market private equity firm Staple Street Capital has acquired Mid-States Supply Company through a bankruptcy court sale.

The buyer was the stalking-horse bidder in a Section 363 bankruptcy court auction. The purchase price was $25 million in cash, with a negative adjustment for working capital, plus certain liabilities, court documents showed.

The company filed Chapter 11 in February in the Western District of Missouri.

The bankruptcy court documents said Mid-States Supply Company initially owed $45 million under a credit agreement with Wells Fargo dating from 2011, a loan which eventually increased to $60 million. However, this amount had shrunk to $16 million by the time of the asset-sale closing, and was not assumed by the buyer.

SSG Advisors and Frontier Investment Banc Corporation were hired as investment bankers for the sale process.

Kansas City, Mo.–based Mid-States Supply sells pipes, valves, fittings, and controls, and provides related services to the refining, oil-and-gas, and industrial markets.

Staple Street Capital is investing from a $265 million fund, and targets $15–75 million of equity per transaction, aiming at control investments. Founders are Stephen Owens, formerly of the Carlyle Group, and Hootan Yaghoobzadeh, formerly of Cerberus Capital Management. — Abby Latour

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Leveraged Loans: Purchase Price Multiples on European LBOs Rise

european LBO purchase price multiple

LBOs in Europe are getting more expensive for private equity sponsors.

The average purchase price, as a multiple of trailing EBITDA, reached 10x in 2016’s first quarter, more than any full-year average, according to S&P Global Market Intelligence LCD.

The multiples paid on these buyouts fall across a wide range. Many of the deals that came to market in the first quarter were bought for an unremarkable multiple, in the 8–9x area, but a good handful of transactions topped 10x — some by a fair margin. – Ruth McGavin

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This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Southcross Holdings emerges from Chapter 11

Southcross Holdings, the parent company of Southcross Energy Partners, has emerged from Chapter 11, the company announced yesterday.

As reported, the bankruptcy court overseeing the company’s Chapter 11 on April 11 confirmed the company’s reorganization plan and approved the adequacy of its disclosure statement following a combined hearing.

As also reported, the company filed a prepackaged Chapter 11 on March 28 in Corpus Christi, Texas (see “Southcross Holdings files prepack Ch. 11 with new $170M investment,” LCD News, March 28, 2016). The reorganization plan will result in the elimination of almost $700 million of funded debt and preferred equity obligations, along with a new $170 million equity investment from the company’s existing equity holders, EIG Global Energy Partners and Tailwater Capital.

Among other things, under the company’s contemplated reorganization plan, an $85 million DIP from existing equity holders is to be converted into one-third of the equity of the reorganized company. DIP lenders are also to provide an additional exit investment of $85 million for an additional one-third of the reorganized equity. The company’s term lenders are slated to receive, among other things, the remaining one-third of the reorganized equity. — Alan Zimmerman