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Late to party, Bain targets global middle market strategy for BDC

While no stranger to lending to middle market companies, Bain Capital is a latecomer to the BDC party. Other asset investment firms of its size embraced the structure years ago.

A combination of demand from institutional investors and lessons learned from the lenders that came and went during the credit crisis motivated the wait.

“We haven’t gone for explosive growth,” said Michael Ewald.

Calls for a BDC’s advantageous structure led to the SEC filing of the registration statement for Bain Capital Specialty Finance on Oct. 6. The BDC will invest in middle market companies generating $10 million–150 million in annual earnings, with ones that generate $20–75 million in EBITDA the primary target.

Ones smaller than those, generating $10–20 million in earnings, generally have very health relationships with regional banks, so lending to them is more competitive.

Bain plans to differentiate themselves from the crowded playing field of BDCs that lend to middle market companies by investment choices made for the 30% of assets in non-qualifying investments. Here, Bain aims to target European and Australian companies.

The credit originations team under Ewald reflects this: staff in Melbourne is increasing to four from three, seven people are based in London, and the rest are in New York, Boston, and Chicago.

The previous name of the entity is Sankaty Capital Corp, the filing showed. The BDC will be externally managed by Bain professionals through BCSF Advisors. The BDC’s board consists of David Fubini, Thomas Hough, and Jay Margolis. Investment decisions are made by the committee that governs other Bain Funds, and consists of Jonathan Lavine, Tim Barns, Stuart Davies, Jonathan DeSimone, Alon Avner, Michael Ewald, Christopher Linneman, and Jeff Robinson.

Investor capital at Bain has previously had exposure to the middle market lending asset class through other funds, including a dedicated $400 million direct lending fund raised at the start of 2015. In addition, Bain is currently investing from a $1.5 billion fund targeting junior debt investments at middle market companies, with another $3.5–4 billion targeting senior debt of middle market companies through others types of funds and managed accounts.

The BDC has been investing for about three weeks, and is expected to ramp up fully over one year. Excluding leverage, the size is $546 million. The private BDC has a 3-1/2 year investment period, after which it will be wound down, unless it is listed publicly before then.

Many BDCs in recent years have struggled with shares trading below net asset value, marring fundraising efforts through share sales. Before then, the BDC would need to be fully invested, and grow more, with at least $750 million in equity.

Per Ewald, “There’s potential to take it public, but we’ll figure that out when the time’s appropriate. There haven’t been a lot of BDC IPOs lately, so that might be the bigger news story.” — Abby Latour

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers 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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PetSmart to Reprice $4.25B Leveraged Loan – Again

petsmartLead arranger Citi today launched a repricing of the roughly $4.25 billion B term loan due March 2022 for PetSmart, according to sources. Cashless roll commitments are due by 5 p.m. EDT on Wednesday, Oct. 5, and new money commitments are due by 5 p.m. EDT on Thursday, Oct. 6.

The issuer is seeking to lower pricing on the covenant-lite term loan to L+300, from L+325, with the same 1% LIBOR floor. The repriced loan is offered at par with six months of 101 soft call protection.

PetSmart was last in the loan market in 2015 when it repriced its then $4.3 billion term loan to L+325, from L+400, with the same 1% floor. That transaction was completed just a few months after the original placement that backed the acquisition of the specialty pet retailer by a BC Partners–led consortium.

Existing issue ratings are BB–/Ba3. PetSmart is rated B+/B1. — Jon Hemingway

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Recap/Dividend Deals Continue to Pepper September Leveraged Loan Mart

Dividend loan activity picked up in September where it left off in August, with $2.4 billion of these credits launched to market so far this month (through Sept. 20), including $2.3 billion of institutional debt, according to LCD, an offering of S&P Global Market Intelligence.

While September volume trails the $4.9 billion ($4.1 billion institutional) recorded in all of August, a large chunk of last month’s activity comes via one deal, the jumbo $2.2 billion term loan for Harbor Freight Tools. By number of transactions, the two months are virtually on par—seven deals in August versus six in the first three weeks of September.

dividend 1To put September’s figure in perspective, the average dividend-related loan volume for the last 12 months is $2.2 billion, and last September saw just $700 million of supply, all of it pro rata.

Note that the data reflect loans whose sole purpose is to recapitalize the company, and excludes M&A transactions, such as the mid-September add-on for Avantor Performance Materials. The manufacturer of high-performance chemistries and materials issued a $665 million incremental B term loan to fund the merger with NuSil Technology, repaying existing NuSil debt and funding a dividend in the process.

For the quarter to date, $9.3 billion of loans funded a dividend, down from $14 billion in 2Q16 and $12.8 billion in 3Q15.

dividend 2The recent rush of dividend deals comes after a relatively dry month of July regarding opportunistic loan issuance, as the market recovered from the volatility that followed the Brexit vote. Aside from the $70 million add-on for Plaskolite mid-July, no other dividend-related loans launched until the last few days of the month.

Incorporating the high yield market, total leveraged finance issuance funding dividends was $13.2 billion in the quarter to Sept. 20, including $3.9 billion of bonds. While dividend loan issuance fell by 34% from the second quarter, high-yield bond issuance backing these deals rose by 25%, to a two-year high, on the back of two large Yankee borrowers, Ardagh Packaging and Ziggo.

Turning back to just loans, smaller borrowers have been tapping the market to extract dividends at a higher rate in the third quarter. Of the $9.3 billion raised to fund dividends, $1.6 billion, or 17%, came from deals sized at $350 million or less, up from just $870 million/6% in the second quarter. In fact, this is the highest volume of dividend recap loans for this size bucket since the third quarter of 2014. Recent examples include OrthoLite ($200 million), Mediware Information Systems ($300 million), and Floor & Décor (also $300 million).

dividend 3Of course, sponsors drive the dividend deal market. Private-equity backed borrowers accounted for roughly 70% of overall dividend-related loan volume in the quarter to Sept. 20, on par with the prior quarter and down from 85% in last year’s dividend peak. In absolute terms, sponsored dividend loan volume fell to $6.4 billion, from $10.3 billion in the second quarter.

dividend 4Not all of the money raised will go to the private equity owners, however, as most of these transactions also refinance existing debt. Looking at just the amount paid to sponsors, the leveraged loan market has financed $1.7 billion of dividends so far in the third quarter, down from $5.4 billion in the second quarter, which included a large payout for CHG Healthcare and dividend transaction for Avantor that wrapped in June, preceding the M&A loan that launched this month. These two deals alone returned over $1 billion to the sponsors. In contrast, the third quarter has seen a higher concentration of middle market deals, resulting in a lower total payout amount.

For the year to date, private equity funds extracted $7.1 billion of dividends via the loan market, down 31% from this time in 2015.

dividend 5On deals for which LCD tracked the original LBO, sponsors extracted 78% of their original capital contribution, on average, via a 2016 recap, up slightly from 74% in 2015. However, the average time between the initial buyout and recap extended to 3.5 years, almost a year longer than in 2015, though there is a great distribution within the 2016 sample. Harbortouch, for instance, returned to market three months after its initial buyout while LANDesk Software has a much longer history with its sponsor, having been acquired six years ago. The latter had deleveraged since its last trip to market in 2014 (also a recap transaction), and has bolstered EBITDA through growth and acquisition activity, according to LCD.

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In terms of leverage, this year’s crop of sponsored dividend transactions was on par with 2015 and 2014, with an average pro forma debt/EBITDA ratio of 5.1x. While this is more aggressive than the low 4x area seen in 2010 through 2012, it is still considerably shy of the record high of 5.4x set in 2007. – Marina Lukatsky

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Ancestry.com Returns to Leveraged Loan Mart with $1.9B Recap Deal

ancestry.com logoAncestry.com is back in the loan market with a $1.9 billion recapitalization transaction that will include a $1.35 billion first-lien term loan and a $550 million second-lien term loan, according to sources. A lender call is scheduled for Tuesday at 12:30 p.m. EDT.

Note that J.P. Morgan is left lead on the first-lien and Deutsche Bank leads the second-lien.

Price talk on the seven-year first-lien term loan is L+425–450, with a 1% LIBOR floor, offered at 99.5. Price talk on the eight-year second-lien tranche is L+850, with a 1% floor and an OID of 98.5.

Proceeds will be used to refinance the issuer’s existing $728 million B term loan due 2022, $300 million of 11% opco notes due 2020, and $390 million of 9.625% holdco PIK toggle notes due 2018 as well as to fund a return of capital to shareholders, sources said.

Ancestry’s existing cov-lite term loan was placed in 2015 and that also backed a recapitalization.

Current corporate ratings are B/B2. — Jon Hemingway

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers 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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Apollo Lines Up $3.425B Leveraged Loan Package Backing Rackspace LBO

rackspaceRackspace Hosting provided the breakdown of the $3.425 billion financing package that will back the buyout of the software company by Apollo Global Management. The financing commitment includes a term facility of up to $2 billion, a $225 million revolver, and an unsecured bridge loan of up to $1.2 billion, a regulatory filing shows.

Citigroup, Deutsche Bank, Barclays, Credit Suisse, and Royal Bank of Canada are leading the financing behind the $4.3 billion buyout. PSP Investments Credit USA also is providing a portion of the financing. The sponsor’s equity contribution will be up to $1.707 billion, according to the filing.

The purchase is expected to close in the fourth quarter, pending customary closing conditions.

Apollo last month announced that it was taking the NYSE-listed company private for $32 per share in cash. After closing, Searchlight Capital Partners will purchase an equity stake in the acquired company.

Rackspace’s existing debt includes a $500 million issue of 6.5% notes due 2024 that was placed in November of last year. Those notes traded at 109 this morning, compared to a 103 context before the news broke last month, trade data shows.

San Antonio, Texas–based Rackspace is buying the cloud computing company that generated revenue in 2015 of $2 billion. —Staff reports

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Marketo’s $1.79B Take-Private Purchase Backed by Debt from Golub

Golub Capital punched upmarket to provide the debt financing behind the $1.79 billion take-private purchase of San Mateo-based digital-marketing company Marketo (NASDAQ:MKTO) by Vista Equity Partners.

The purchase closed today after shareholders approved the agreement on July 28, Marketo announced this morning.

Wilson Sonsini Goodrich & Rosati served as legal advisor to Marketo. Kirkland & Ellis LLP served as legal advisor to Vista. —Kelly Thompson

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KKR Capital Launches $300M Leveraged Loan Backing Epicor Buy

KKR Capital Markets has scheduled a lender call for today at noon EDT to launch a $300 million of incremental facilities for Epicor. The financing includes a $225 million non-fungible first-lien term loan alongside a $75 million second-lien term loan that has been preplaced, according to sources.

epicor logoAs reported, KKR is leaving Epicor’s existing loans in place as it acquires the software concern from Apax Partners. A $2.11 billion financing arranged last year by Jefferies, Macquarie, and Nomura included pre-cap language that would allow the loans to remain in place following the sale to a qualified sponsor.

The 2015 dividend recapitalization included a $1.4 billion covenant-lite first-lien term loan due 2022 (L+375, 1% LIBOR floor), a $100 million revolver due 2020, and $610 million of privately placed second-lien loans. That transaction leveraged Epicor at 5.1x first-lien and roughly 7.3x total.

Epicor is a global provider of business software for the manufacturing, distribution, retail, and services industries. — Staff reports

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Beechbrook Capital Raises €100M for Direct Lending Fund

Private debt manager Beechbrook Capital has reached a first close of more than €100 million on its third private debt fund. Private Debt III is targeting €200–250 million in commitments from investors with a hard-cap of €300 million, said managing partner Paul Shea.

The latest vehicle in the series maintains the same investment strategy and will provide private debt, including mezzanine and unitranche, to lower mid-market buyouts in northern Europe.

beechbrookLimited partners in the first close include the European Investment Fund and British Business Bank’s investment arm as well as other European institutional investors. Beechbrook expects to hold a second close at the end of 2016 before the final close, which is now slated for 2017, to allow allocations from next year to come in.

The new fund is an English limited partnership, said Shea, adding that there will be at least two years after the U.K. triggers its departure from the EU before access to the single market becomes an issue. He said that the question of passport access to the EU single market wasn’t flagged as a major issue by investors ahead of the close.

Of more concern to investors, Shea said, was the short-term impact of Brexit on the U.K.’s economic outlook. The lower mid-market, Beechbrook’s specialty, is relatively insulated from the fallout focusing more on micro issues. Potential falls in asset prices could limit appetite for mezzanine debt, but that is balanced out by lower availability of senior debt and potential for improved returns from Beechbrook’s equity kickers, he added.

Beechbrook’s private debt fund focuses on European private equity–sponsored businesses with turnover between €10–100 million. Its loans generally range from €5–15 million per transaction and support acquisitions, shareholder re-alignments, and growth plans.

The firm has a separate UK sponsorless fund which reached a first close of more than £100 million in January.

One of the firm’s most recent deals was from the sponsorless fund, an £8.6 million loan to 4Most to support a reorganisation of shareholders and the business’ growth plan. 4Most provides regulatory and credit-risk analytics consultancy to banks, credit card providers, and other businesses with consumer credit exposure.

In total, Beechbrook has executed 36 transactions across the European lower mid-market and has fully exited 10 of those deals. — Rachel McGovern

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Epiq Systems Eyes $1.3B of Debt for Buyout by OMERS, Harvest Partners

Bank of America Merrill Lynch, Goldman Sachs, Antares Capital, and Golub Capital have agreed to provide roughly $1.3 billion of debt financing to back the acquisition of Epiq Systems by OMERS Private Equity, the private equity arm of OMERS pension plan, and funds managed by Harvest Partners, a middle market private equity fund, according to an Epiq Systems statement.

Epiq SystemsEpiq Systems this morning announced that it had entered into an agreement to be acquired for $16.50 per share in cash, representing a total value of roughly $1 billion, including assumed debt. The acquisition is expected to close in the fourth quarter of 2016.

Upon completion of the acquisition, Epiq will become a privately held company and will be combined with DTI, a legal process outsourcing company majority-owned by OMERS and managed by OMERS Private Equity.

In April 2015, Epiq Systems obtained a $75 million fungible add-on to its B term loan due August 2020 (L+375, 0.75% LIBOR floor). As of March 31, there was roughly $366 million outstanding under the B term loan, $19 million outstanding under its $100 million revolver due 2018, and roughly $12 million outstanding under its capital leases.

Kansas City, Kan.–based Epiq is a global provider of integrated-technology solutions for the legal profession. Corporate issuer ratings are B+/B1. The company’s shares currently trade on the Nasdaq under the ticker EPIQ. — Richard Kellerhals

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Diamond Resorts Rolls out $600M High Yield Bond Offering Backing Apollo LBO

Diamond Resorts is offering $600 million of eight-year (non-call three) unsecured notes, sources say. Bookrunners on the deal are RBC Capital Markets (left), Barclays, and Jefferies.

A roadshow for the offering will run Aug. 1–4, sources noted. The proceeds will be used to back Apollo Management’s $2.2 billion purchase of Diamond Resorts. Apollo in late June agreed to acquire the company for $30.25 per share. At the time the deal was announced, the company said closing was expected over the next few months.

Take note, the issuer is also shopping a $1.2 billion seven-year term loan B and a $100 million revolver to fund the buyout. Price talk for the loan has been set at L+500, with a 1% LIBOR floor and a 99 offer price.

Expected ratings for the notes are CCC+/Caa1. On July 25, S&P Global Ratings lowered its corporate credit rating for Diamond Resorts to B from B+, noting the incremental leverage and the company’s financial sponsor ownership.

Diamond Resorts International operates a network of more than 420 vacation destinations located in 35 countries throughout the continental U.S., Hawaii, Canada, Mexico, the Caribbean, South America, Central America, Europe, Asia, Australasia, and Africa. — Staff reports

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