| NEW YORK, Sept 17
NEW YORK, Sept 17 Lenders providing debt for
private equity buyouts of US middle market companies are seeing
an upturn in dealflow after the Labor Day holiday in what has
otherwise been a disappointing year in terms of volume.
With just two weeks left in the third quarter, only US$29bn
of US middle market private equity deals have been completed in
the year to date, which is about 40% below the volume recorded
in the first three quarters of 2014, according to LPC data, as
new money opportunities have remained scarce.
Lenders are confident, however, that dealflow will continue
to pick up heading into the fourth quarter, based on growing
deal pipelines and auction processes that have yet to mandate
lead arrangers for debt financings.
At least four new deals landed on investors desks since
Labor Day, including a pair of M&A-related transactions for
analytics provider Novetta Solutions and IT systems performance
monitoring company Idera Inc, one dividend recapitalization loan
for travel company Apple Leisure Group and a sponsor-to-sponsor
buyout for Universal Fiber Systems, a manufacturer of
solution-dyed and natural synthetic fibers.
All of the four new deals have first- and second-lien loan
structures. Three of the four (Novetta, Idera and Apple Leisure)
are led by Jefferies and two (Novetta and Idera) are
Novetta launched a US$325m credit facility on Wednesday that
funds alternative asset manager The Carlyle Group's acquisition
of the company from financial sponsor Arlington Capital.
Jefferies is leading the covenant-lite transaction, which is
split between a US$40m revolving credit facility, a US$200m
first-lien term loan and a US$85m second-lien term loan, sources
said. In addition to Jefferies, Société Générale has also
committed to provide debt financing for the sale, according to a
Jefferies is also leading a US$425m covenant-lite credit to
back Idera's acquisition of Embarcadero Technologies. Idera is
backed by TA Associates. The deal, which launches on Thursday,
includes a US$25m revolving credit, a US$300m first-lien term
loan and a US$100m second-lien term loan.
The third deal led by lead arranger Jefferies, also
launching Thursday, is a US$510m credit facility for Apple
Leisure that funds a dividend recapitalization, sources said.
Jefferies is leading the deal with Credit Suisse and Nomura. The
facility is split between a US$50m revolving credit, a US$330m
first-lien term loan and a US$130m second-lien term loan.
Lastly, Universal Fiber Systems is in market with a US$240m
first- and second-lien leveraged buyout loan that backs the
company's secondary buyout to H.I.G. Capital from Sterling
Group, sources said. BNP Paribas is arranging the financing,
which launched Sept 10. Commitments are due Sept 24.
The credit facility is split between a US$35m revolving
credit, a US$165m term loan B (TLB) and a US$40m second-lien
term loan. Price guidance on the TLB is set at 475-500bp with a
1% Libor floor and 99 original issue discount. The second-lien
term loan is guided at 850-875bp, also with a 1% Libor floor.
The discount is guided at 98. Moody's estimates adjusted
financial leverage in the high 4.0 times debt-to-Ebitda area.
These deals are raising hopes that middle market private
equity borrowing is picking up. Liquidity and investor appetite
has remained strong in the highly competitive segment and
pricing has been stable compared to the large corporate market,
which is more susceptible to wider market volatility, but
volumes have simply not materialized.
Sky high valuations and cash-rich corporate buyers who are
willing to pay high purchase price multiples to outbid private
equity firms at auction are largely to blame for the dropoff in
lending, sources said. The decline in volume is also partly due
to regulators' stricter implementation of Leveraged Lending
Guidance (LLG) which limits the amount of leverage that
regulated banks are able to give private equity firms.
"The institutional bid has appetite for leverage but banks
are hampered as far as what they can and can't do," said one
Direct lending platforms and alternative debt capital
providers are taking market share in the middle market as a
result. Because many of these deals are completed as club deals
with three or four lenders rather than syndicated to a wide
swath of institutional investors, the drop off in syndicated
volume is partly explained by the shift away from traditional
lenders, some market participants said.
Any deal under US$250m will go straight to direct lenders
instead of a traditional bank and institutional execution, one
private equity sponsor said. The direct lending route minimizes
the added level of execution risk that comes with the LLG.
Execution aside, market participants remain confident that
the recent flurry of deals is an indication of a strong fourth
(Editing By Tessa Walsh and Jon Methven)