content

Solar Capital BDC – PIMCO joint venture to focus on unitranche middle-market loans

Solar Capital Partners is seeking to grow in what it sees as one of the few remaining spaces where opportunity abounds since regional banks retrenched after the credit crisis: unitranche lending to middle-market companies. The investment firm, which manages two BDCs, has teamed up with PIMCO in the venture.

This month, the Solar Capital BDC, which trades on Nasdaq under the ticker symbol SLRC, announced the formation of a joint venture with PIMCO to focus on unitranche loans to private equity-owned and entrepreneur-owned middle-market companies, targeting companies across sectors with a steady track record of generating annual EBITDA of $20-50 million.

The unitranche initiative marks the first time Solar Capital will have the scale needed to underwrite and hold entire unitranche loans, adding to the range of products already offered to its private equity clients.

The joint venture will initially comprise equity commitments of $300 million from Solar Capital and $43.25 million from the PIMCO affiliate. The PIMCO affiliate committed an additional $256.75 million of capital to co-invest in unitranche loans alongside the joint venture. With expected eventual leverage of 2x debt-to-equity, the unitranche loan program will have $1.5-1.8 billion of investable capital.

“To be relevant in this space, you need to write a check for $100 million to $200 million. That’s why we sought a joint venture partner,” said Michael Gross, CEO and co-founder of the investment firm.

“This is not the type of leverage that CLOs are using—ours is a conservative up to 2x. So we don’t need to rely on buoyant credit markets,” said Gross. “But the leverage will allow us to scale up and buy bigger pieces of the same loan, and thus become more relevant to the borrower.”

Despite the frothiness in credit markets, middle-market unitranche lending remains attractive, according to Gross. There, leverage levels have remained at 4.5-5.5x, covenants are intact, and capital structures still have a significant equity cushion, Gross said.

“From a borrower’s perspective the market is very attractive. As an investor, it’s time to be incredibly selective,” said Bruce Spohler, Solar Capital’s chief operating officer and co-founder of the investment firm.

Recovery rates for unitranche loans are still untested for the most part, but will likely fall between the recovery levels of mezzanine debt and middle-market bank loans, said Gross.

As of June 30, Solar Capital’s portfolio was valued at $984 million, consisting of 43 portfolio companies and was invested roughly 74% in senior secured loans and Crystal Financial, whose loans are 100% senior secured. Among Solar Capital’s portfolio were loans backingAdams OutdoorWireCoGlobal Tel*Link, and Blue Coat Systems.

In addition to the Solar Capital SLRC BDC, Solar Capital Partners also manages Solar Senior Capital, which trades on Nasdaq under the ticker symbol SUNS. Solar Senior Capital BDC last week unveiled a first-lien loan joint venture with Voya Investment Management.

Solar Senior Capital committed $50 million to the first-lien loan program with Voya Investment Management, while Voya is committing $7.25 million. Management also expects to leverage this vehicle 2x debt-to-equity. Voya Investment Management, an investment advisor for several insurance subsidiaries of NYSE-listed Voya Financial, was formerly known as ING U.S.

As of June 30, Solar Senior Capital’s portfolio was valued at $266 million, consisting of 37 portfolio companies and was invested roughly 97% in senior secured loans and Gemino Senior Secured Healthcare, whose loans are 100% senior secured. Among Solar Senior’s portfolio were loans backing Aegis Toxicology SciencesAsurionConvergeOne, and Genex.

Solar Capital and Solar Senior Capital expect to begin funding investments in their respective joint ventures before year-end.

Unitranche loans, usually from a single lender, offer an interest rate between that of senior loans and subordinated debt. For borrowers, these loans are simpler to manage because they are not from a group of lenders. From the lender’s perspective, unitranche loans could see a larger recovery in the event of a default due to the absence of more senior or junior creditors. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more

content

CLO roundup: September gets off to slow start in both US, Europe

It’s been a tentative post-summer return for the CLO market with just three new issue CLOs pricing so far in the U.S. this month, and the Dryden XXVII tap providing Europe’s only new issue activity to date. Still, a number of transactions are expected to price this week, ahead of the IMN’s ABS East Conference in Miami next week (Sept. 21-23).

Global CLO issuance in 2014 stands at $97.71 billion, according to LCD.

LCD subscribers can click here for full story, analysis, and the following charts:

  • Deal pipeline
  • US arbitrage CLO issuance and institutional loan volume
  • European arbitrage CLO issuance and institutional loan volume


– Sarah Husband

 

content

Harbinger’s amended LightSquared plan details new DIP, exit funding

lightsquared logo

Harbinger Capital has filed an amended reorganization plan for LightSquared Inc. detailing, among other things, the plan’s proposed $460 million in new DIP financing and the proposed $360 million of exit financing that is slated to ultimately replace the new DIP.

The amended plan also disclosed financing commitments for both facilities from Harbinger and JPMorgan Chase.

In its Sept. 11 filing, Harbinger also filed a plan support agreement with the Manhattan bankruptcy court indicating that MAST Capital, the holder of LightSquared Inc.’s prepetition secured debt, had formally signed onto the Harbinger plan.

As reported, the Harbinger plan would reorganize LightSquared Inc. separately from its unit, LightSquared LP. The limited partnership unit has roughly $2 billion of first-lien secured debt, including accrued but unpaid interest outstanding, and is the operating unit that LightSquared was using to build its wireless network. This is also the LightSquared LP debt that was acquired by Charles Ergen, founder and CEO of LightSquared competitor DISH Networks that has resulted in a significant amount of litigation and dissension in the case (see “LightSquared aims for Oct. 20 confirmation hearing amid deep divides,” LCD, Aug. 12, 2014).

The Harbinger plan for LightSquared Inc., which in addition to LightSquared LP controls several other communications companies, most notably Reston, Va.-based One Dot Six, calls for Harbinger and JPMorgan to fund by Oct. 31 a replacement DIP for the company via a $160 million senior DIP and a $300 million junior DIP. The proceeds of the new DIP would be used to repay the company’s existing DIP facility, which would be allowed in the amount of $109.28 million, and about $131.128 million of the company’s prepetition secured credit agreement debt, which would be allowed in a total amount of $331.128 million.

The remaining $200 million of the prepetition secured claim – which as noted above is held by MAST Capital – would be purchased on a dollar-for-dollar basis by JPMorgan and converted into a like-sized portion of the junior DIP, with the end result being that MAST’s claim would be paid in full, in cash.

The remaining funding for the junior DIP would consist of $100 million of new money to be provided by Harbinger. Interest under the junior DIP would be at L+200 with a 1% LIBOR floor.

Upon emergence from Chapter 11, the senior DIP facility would convert into a $160 million, four-year term facility with One Dot Six as the borrower, again at L+1,100 with a 1% LIBOR floor, according to the filing.

As for the junior DIP, the $200 million portion provided by JPMorgan via the purchase/conversion of the prepetition debt would be replaced by a new $200 million exit facility at reorganized LightSquared Inc., the terms of which were not provided in the filing.

In exchange for its portion of the junior DIP claim, meanwhile, Harbinger would receive, among other things, new One Dot Six preferred shares having an original stated principal value of $175 million and 70% of the reorganized One Dot Six common shares.

JPMorgan would also receive, in exchange for the prepetition preferred shares of LightSquared Inc., held by its affiliate, SIG Holdings, 100% of the equity in reorganized LightSquared Inc. Among other things, the reorganized LightSquared Inc., would hold, once all of the reorganization transactions were complete, One Dot Six preferred shares having an original stated principal value of $160 million and 30% of the reorganized One Dot Six common shares.

Last, but not least, the final piece of the reorganized capital structure would be a $40 million, five-year second-lien exit facility to issued by reorganized LightSquared Inc. to reorganized One Dot Six, priced at L+200, with a 1% LIBOR floor.

It should be noted that the Harbinger plan is contingent on, among other things, the LightSquared LP lenders being paid in full under the previously reported reorganization plan filed by LightSquared, or, alternatively, a judicial ruling that they do not hold a claim against LightSquared Inc., arising out of the parent company’s guarantee of the limited partnership’s credit agreement. That determination will depend, in part, on the results of what will likely be a contested valuation of the LP company, since a significant portion of the LightSquared LP lender recovery is in the form of equity.

As reported, the company’s confirmation hearing is scheduled for Oct. 31, with a confirmation date of Oct. 31 contemplated under the current schedule. – Alan Zimmerman

 

content

Leveraged loan funds see outflow for 9th straight week, modest ETF influence

Cash outflows from bank loan funds declined slightly to $342 million during the week ended Sept. 10, versus outflows of $435 million last week and $297 million two weeks ago, according to Lipper. The influence of bank-loan ETFs on this week’s number was 21%, as Lipper recorded a $70 million outflow from ETFs. This compares to a $20 million inflow into ETFs last week.

There now have been 20 weeks of outflows over the past 22 weeks, for a total outflow of $10.9 billion over that span, which follows a record-shattering 95-week inflow streak that totaled $66.7 billion.

The trailing four-week average narrows to negative $404 million per week, from negative $490 million last week. This measure remains below the recent peak of negative $858 million from the week ended June 11.

The year-to-date fund-flow reading pushes deeper into negative territory, at $3.9 billion, based on a net withdrawal of $4.3 billion from mutual funds against a net inflow of $459 million to ETFs. In the comparable year-ago period, inflows totaled $42 billion, with 11% tied to ETFs.

The change due to market conditions was a negative $308 million, versus total assets of $103.7 billion at the end of the observation period. The ETF segment comprises $8 billion of the total, or approximately 8%. – Joy Ferguson

LoanFundFlow_9.10

content

Solar Senior Capital sets up middle-market ventures with Voya, PIMCO

solarSolar Senior Capital and Voya Investment Management have unveiled plans for a joint venture to lend to private equity-owned and entrepreneur-owned middle-market companies.

In a press release yesterday, Solar Senior Capital said it has committed $50 million to the first-lien loan program, while Voya is committing $7.25 million. The joint venture will primarily invest in senior secured term loans.

Solar Senior Capital and Voya plan to seek third-party financing to leverage the entity to 2x debt-to-equity, according to yesterday’s statement. Solar Senior Capital and Voya expect to begin funding the portfolio with new investments before year-end.

The announcement comes on the heels of news last week that Solar Senior entered an agreement with an affiliate of a PIMCO fund. That joint venture will invest in middle-market senior secured unitranche loans sourced by the origination platform used by Solar Senior Capital. Initial funding commitments will total $600 million, a Sept. 2 SEC filing said.

The PIMCO joint venture entity, referred to as a senior secured unitranche loan program, will initially comprise equity commitments of $300 million from Solar Senior Capital and $43.25 million from the PIMCO affiliate. The PIMCO affiliate committed an additional $256.75 million of capital to co-invest in unitranche loans alongside the program.

Solar Senior Capital and the PIMCO affiliate are similarly in advanced talks with a third-party senior debt provider over financing, targeting leverage of 2x debt-to-equity for the portfolio.

Solar Senior Capital, listed on Nasdaq as SUNS, is a business development company focused on leveraged, middle-market companies. Voya Investment Management is an investment advisor for several insurance subsidiaries of NYSE-listed Voya Financial, was formerly known as ING U.S..

As of June 30, Solar Senior Capital’s portfolio was valued at $266 million, consisting of 37 portfolio companies and was invested roughly 84% in senior secured loans. Among them were loans backing Aegis Toxicology Sciences, Asurion, ConvergeOne, and Genex. – Abby Latour

 

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more

content

Metis, backed by Garrison Investment Group, joins swelling ranks of lenders to middle market

Garrison_Investment_Group_Lp_1089927A new player has joined the growing ranks of lenders to smaller companies, Metis Commercial Finance. The firm will target loans of $1-20 million to lower middle-market companies generating annual revenue of $10-100 million.

Metis is backed by middle-market credit and asset-based investor, Garrison Investment Group.

James Irwin, founder of Meridian Healthcare Finance and MC Healthcare Finance, is CEO of Metis, which will have offices in San Diego and Boston. Dan O’Rourke, a founder of Salus Capital Partners and NewAlliance Commercial Finance, is chief credit officer.

“Lending to the upper middle market has come back to where it was pre-credit crisis. Lending to the lower middle market hasn’t come back nearly as much,” said Irwin. “That’s where there’s opportunity. It’s underfunded and under-banked.”

Metis’ product offering is wider than that of many specialty lenders, offering a range of debt structures, from asset-based revolvers, term loans based on cash flow and other assets, to unitranche debt, as companies grow or weather tough times.

Metis will be national in scope, instead of regionally focused, like many lenders to middle-market companies, and lend across sectors.

“Banks today are prohibitive and not cost-effective in meeting the needs of these borrowers,” said O’Rourke. “As a non-bank you have much greater flexibility.”

The management team includes Bob Seidenberger, who will head sales and marketing at Metis and was previously vice president, specialty finance at BofI Federal Bank and a director at MC Healthcare Finance. Mike Pestrak, previously a portfolio manager at Celtic Capital, will be senior vice president of underwriting at Metis. – Abby Latour

 

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more