Bonds News

Direct lenders support existing investments but open for opportunities

NEW YORK, April 2 (LPC) - Firms that lend to small and mid-sized companies are looking to shore up existing investments amid market volatility caused by the coronavirus pandemic, but are still open for new deals as valuations fall.

Managers of business development companies (BDCs) have been reaching out to borrowers to gauge their financial health and ascertain their plans to weather any economic hit that may result from market volatility.

“It’s an extremely challenging time, and our overall disposition is to be incredibly cautious in deploying capital,” said Craig Packer, co-founder of Owl Rock Capital Partners, which oversees BDCs that lend to US middle market businesses.

“The vast majority of our resources will be used to support existing portfolio companies and work with sponsors to make sure they have enough wherewithal to get through,” he said. “But we and other (direct lenders) are positioned and can extend (new capital) in moderation.”

The virus has interrupted supply chains, closed retail operations, and reduced consumer demand, pushing the world economy toward a recession. Numerous companies have laid off workers or put them on leave for the near term.

In response, the Dow Jones Industrial Average fell more than 26% since the start of the year through Wednesday. Loan prices followed a similar trajectory, with the LPC 100, a cohort of the 100 most liquid US loans, dropping more than 21% since the start of the year to an almost 11-year low of 77.87 cents on the dollar March 23, then recovered slightly to 87.6 cents Wednesday.

Businesses are examining their balance sheets, looking for ways to cut costs and determine their access to capital, in some instances drawing on their revolving lines of credit to ensure ample liquidity.

Art Penn, founder of PennantPark Investment Advisers, which lends to middle market companies with earnings before interest, tax, depreciation and amortization (Ebitda) between US$10m-US$50m, said his firm has already received requests for revolver drawdowns.

“We stand up ready to fund those commitments,” he said. “We have liquidity and are able to do so. Every company takes a different tact – some draw all of the revolver and some draw none. It’s a case by case decision based on the company’s need for liquidity.”

No businesses PennatPark currently lends to have asked for additional funding, Penn said, but it is possible they will in the future.

“As each day of new information sinks in and the length of the breadth of the shutdown (continues), I think (lenders) will focus more inward to help existing companies rather than sign new deals until we get a sense of the bottom and when and how does this end,” he said. “Our top priority is for our existing investors, and how do we protect them.”

There was US$26.26bn of middle market loans issued in the first quarter, down from US$33.06bn in the last three months of 2019, according to Refinitiv LPC data.

“Right now it is: defense first,” said Richard Byrne, president of Benefit Street Partners, an investment manager that oversees about US$27bn in assets. “But if you have excess cash, we think it is a very good time to deploy capital, even though we may not be at the bottom yet.”


Private equity firms are sitting on about US$2trn of dry powder, according to Morgan Stanley, and may want to capitalize on the dip in valuations.

Several funds have “available capital, and there are opportunities as a result of the current disruption in the credit space,” said John Mahon, a partner at law firm Schulte Roth & Zabel. “We see funds looking to provide liquidity to companies if they can do so on attractive terms.”

Some deals that were in the works as the impact of the virus spread are still waiting in the pipeline, while others made it through, sources said.

Owl Rock recently teamed up with Benefit Street Partners for a US$117m unitranche financing to support growth at GoHealth, a portfolio company of Centerbridge Partners that provides an online marketplace for health insurance, according to sources familiar with the financing, and confirmed by an Owl Rock spokesperson.

Owl Rock extended a US$55m incremental first-lien term loan to support Rise Baking Co, a portfolio company of Olympus Partners that produces baked goods for supermarkets’ in-house bakeries. The financing will back Rise’s acquisition of Dawn Foods North American frozen manufacturing business, according to one of the sources and confirmed by the Owl Rock spokesperson. It also provided a first-lien credit facility to support Hellman & Friedman’s buyout of Checkmarx, a software security company.

Spokespeople for Centerbridge and Hellman & Friedman declined to comment. A representative for Olympus could not be reached for comment.

While lenders continue to focus on existing investments, they await new opportunities.

“There is a tremendous amount of uncertainty, and we know that, and activity is slowing, and we expect market activity in the second quarter to be down significantly,” Packer said. “But BDCs are designed to lend to US-based companies. We think the economy will get through this and come back strongly…and there are reasonable places to extend credit responsibly.” (Reporting by Kristen Haunss; Editing by Michelle Sierra)