BUYOUTS-Newcomers seek place offering debt for LBOs

Jan. 27 - Start-up lenders are beginning to make their mark in the private equity markets, a sign that credit conditions are improving from the financial crisis of 2008 and 2009.

Steve Bills of Buyouts magazine reports:

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* Three rounds of fund-raising for NXT start-up

* Fifth Third expands to finance larger deals

* Loan issuance rebounds in fourth quarter

NEW YORK - New senior lenders, sensing an economic recovery, are beginning to make themselves felt in the sponsored LBO market.

Newcomers gaining traction include NXT Capital, which is backed by private equity money, as well as two bank-affiliated lenders -- Fifth Third Sponsor Leveraged Finance and Amalgamated Capital -- which are seeking to build national franchises. The influx of capital promises stronger competition for sponsor business, and potentially lower loan rates and greater leverage.

Lenders provided $21.9 billion of financing for North American sponsor-backed deals in the fourth quarter, just shy of the record $24.1 billion set in the second quarter of 2007 at the peak of the mid-decade boom, according to Thomson Reuters LPC, which tracks the loan market. The $53 billion issuance for the year as a whole was four times the volume of 2009. But that doesn't begin to tell the story, because of the depressed condition of the market as the economy struggled to emerge from the Great Recession.

In some ways, setting out in the midst of the crisis gave the newcomers an advantage, in the sense that they were not struggling with a portfolio full of problem credits.

Consider the case of NXT Capital LLC, a mid-market commercial finance company based in Chicago that launched last May with the backing of Greenwich, Conn.-based Stone Point Capital LLC and the capacity to finance $1 billion in corporate finance and real estate deals.

By the end of the year, the firm had closed on 35 transactions and had attracted additional equity funding, including a $150 million commitment by Ontario Teachers' Pension Plan, an additional $50 million from Stone Point Capital and a $25 million commitment from an unnamed U.S. corporate pension fund.

'A VERY SUCCESSFUL YEAR'

"We had a very successful start-up year," said Robert Radway, NXT's chairman and CEO, who led a group of former principals from Merrill Lynch Capital to start the new firm.

Or consider Fifth Third Sponsor Leveraged Finance, an arm of Cincinnati banking company Fifth Third Bancorp that launched in October 2009. Fifth Third Sponsor Leveraged Finance helped finance a dozen debt deals last year, expanding into bigger deals by lending to sponsors buying companies with $10 million to $75 million in annual EBITDA. The regional bank's existing sponsor business had focused on portfolio companies with $4 million to $10 million of EBITDA, Brian Crabb, a managing director of the unit, told Buyouts magazine.

"Fifth Third overall has taken a lot of share over the last couple of years," Crabb said.

One advantage for the newcomers: arriving in the market at a time when many lenders had frozen solid because of the credit crisis. Amalgamated Bank, a privately owned New York bank whose customer base largely comprises union members, founded Amalgamated Capital in September 2009 with a mandate to seek out and finance LBOs in the lower middle market, which Timothy Clifford, the head of Amalgamated Capital, described as companies with enterprise value less than $100 million, revenue of $15 million to $100 million, and EBITDA of $3 million to $15 million.

"There was no national player servicing the lower end of the middle market," said Clifford, who formerly was a managing director and principal at Churchill Financial and head of the firm's Boston office.

Over the course of the next 15 months, Clifford and his team crisscrossed the country, trying to contact the 500 to 600 firms that sponsored the kind of deals his group was seeking to finance. And it worked: The firm has reviewed 700 opportunities from 240 different sponsors.

It has deployed only $150 million to 10 portfolio companies, but Clifford said that also was part of the plan. Amalgamated Capital is quite disciplined on extending credit, he said. "We say 'no' a lot more than we say 'yes,' but when we say 'no,' we provide a very thoughtful response to our clients."

At the same time, the firm stressed the stability of its funding, which comes from the deposit base of the bank -- and which was a way for Amalgamated Bank to diversify away from a heavy reliance on real estate lending, Clifford said.

"When we say yes, it's a firm yes," he said. "Just because you have a lender give you a commitment, that doesn't mean they're going to be there at the close."

Despite the greater availability of credit, lenders seem to be keeping their heads on risk. Even deals that have large oversubscriptions are still drawing only 3.75x EBITDA multiples on their senior debt, said Crabb of Fifth Third. "The market has anchored at a rational leverage level. I think what you will see in 2011 is you'll probably see pricing compress."

(Buyouts magazine is a Thomson Reuters publication. Editor: david.toll@thomsonreuters.com. www.buyoutsnews.com)