Amalgamated Bank, located in Manhattan’s once busy garment district on 7th Ave is now taking the role of financing the buyouts of small and midmarket companies that giants such as BofA-Merrill, JPMorgan, and Wells Fargo used to underwrite for in the days of easy flowing capital. As the larger banks lick their wounds from the credit crisis and clean up their balance sheets, smaller banks such as Amalgamated are taking the reigns.
CLOs, another popular financing source are also low on capital and refuse to lend to newer deals. Churchill Financial was a specialty finance company that was rolled up into Amalgamated that was started to fill the void of CLOs in deal financing. Amalgamated lends between $5 and $60 million to buyers of companies with enterprise values up to $150 million. The firm aims to generate 8-10% risk adjusted returns for its investors, focusing on the healthcare, consumer, distribution, and education industries.
The need for similar firms has arisen after large lenders to mid market buyout shops such as CIT Group stopped lending. CIT historically lent tens of billions to mid-sized businesses, including billions to private equity portfolio companies. For example, it financed Castle Harlan’s $250 acquisition of Anchor Drilling Fluids Inc. in mid 2008 with $120 milion in senior bank debt, including a $20 million revolver. CIT has not been arranging new debt since July of 2009, when it experienced a sudden cash crunch and began its restructuring process. The company filed for court protection on Nov. 1 with the goal of completing the workout in 30-40 days (please refer to piece on prepackaged bankruptcies).
Allied Capital, another large lender is no longer in business, along with specialty finance company Ares Capital Corp. and GE Capital. Although GE is still doing some business, it has slowed down underwriting dramatically due to its large commercial real estate portfolio. Other historical players that have slowed down include CapitalSource Finance LLC, and Madison Capital Funding.
In their place, banks like PNC Financial Services Group Inc, out of Pittsburgh have entered the market. PNC Equity focuses on companies valued at $25 million ot $150 million. PNC Financial Services Group has been successful in this market and argues that there are few $5 billion commercial banks that have the attributes necessary to run a successful leverage finance franchise. Other firms new to the industry include Susquehanna Bank, Fifth Third Bancorp., and TriState Capital Bank. Private equity firms themselves have entered the industry, such as MidOcean Partners and Genstar Capital (which launched MidCap Financial LLC in Oct. 2008 to finance healthcare companies with TEV between $10 and $200mm). MidCap is now owned by Moelis & Co., an investment banking and private equity firm based NY. For regional banks, cash flow lending isvery profitable, as the Fed Funds rate hovers between 0 and 25 bps.
In terms of pricing, middle market senior loans command about 500 to 600 bps above LIBOR, and can lend between 2.5 and 3.0x cash flow in this type of environment. Issuance for leveraged loans, according to Fitch ratings, is down 40% for the first 9 months of 2009. Business will be booming as experts estimate that there will be about $470 billion in middle market loans coming due in 2014 that need to be refinanced.
For more information, please refer to the Nov. 13th edition of Investment Dealers’ Digest.