| NEW YORK, June 13
NEW YORK, June 13 Regulatory guidelines aimed at
stopping banks from making highly-leveraged loans to risky
borrowers and fierce competition from alternative capital
providers is driving more financing partnerships which are
reshaping U.S. middle market lending.
U.S. commercial banks and Business Development Companies
(BDCs) - a fast-growing group of investment vehicles that lend
to small and mid-sized companies - are increasingly working
together on deals with higher leverage levels to get around
"In the changing regulatory environment in which banks can't
stretch on leverage, we expect to see more partnerships between
lenders," said Fred Buffone, managing director and head of
capital markets at Fifth Street Management, an alternative asset
manager and the investment adviser of two publicly traded BDCs,
Fifth Street Finance Corp and Fifth Street Senior Floating Rate
Banks are seeking partners to underwrite junior debt,
primarily second lien loans, which reduces the total debt
arranged by the banks.
"There are opportunities where banks provide the senior debt
and we provide the junior capital," Buffone said.
More than a year after it was issued, banks are still
grappling with how strictly the Leveraged Lending Guidance will
be applied by federal agencies and what penalties, if any, could
be handed down.
Some regional and commercial banks are already taking a more
cautious approach to underwriting to comply with the guidelines.
BDCs are receiving more calls from commercial banks seeking to
team up to underwrite deals with higher leverage levels, a BDC
Banks are looking for partners to underwrite second-lien
loans on deals that are at or above the maximum threshold of 4.0
times senior debt to Ebitda and 6.0 times total debt to Ebitda
set out in the guidelines.
Loans with higher leverage than the guideline levels are
deemed to be "criticised assets," and regulators are currently
examining the share of banks' loan portfolios that exceeds those
Banks are seeking partners for highly leveraged loans to a
range of mid-sized companies. BDCs have participated in deals
with banks for companies with Ebitda ranging from US$10m to
US$50m or higher, sources said.
BDCs, which have traditionally provided more junior capital,
are now positioning themselves as senior debt providers and are
widely expected to benefit from any significant pullback in bank
In an increasingly crowded field of alternative capital
providers, hotly contested battles for middle market loan
mandates are being won by the ability to offer sponsors and
borrowers a menu of financing options, creative structures
across the capital structure and the ability to commit large
Other more formal partnerships between non-bank lenders and
institutional investors looking to gain exposure to middle
market companies are also developing. Partnerships range from
separately managed accounts and side car vehicles (a type of
co-investing vehicle) to traditional fund structures and new
direct origination platforms.
The resulting pockets of capital allow a range of product
offerings and the ability to commit larger tickets.
Private equity firm Oak Hill Capital Management and
insurance giant American International Group (AIG) said
Wednesday they teamed up to establish Varagon Capital Partners,
an asset manager and direct origination platform focused on
lending to middle market companies.
New York-based Varagon launched with an initial $1.5 billion
investment commitment from AIG with a mandate to lend to
companies with between $10 million and $75 million of EBITDA.
"Middle market participation will continue to grow," said a
lender at a commercial finance company. "To play, and to
survive, you have to have larger hold capacity and diverse
(Editing By Jon Methven)