October 19, 2017 / 6:44 PM / a year ago

Fitch Places NewStar on Rating Watch Evolving Following Acquisition Announcement

(The following statement was released by the rating agency) CHICAGO, October 19 (Fitch) Fitch Ratings has placed NewStar Financial, Inc.'s (NewStar) Long-Term and Short-Term Issuer Default Ratings (IDRs) of 'BB-' and 'B', respectively, on Rating Watch Evolving. This action follows the Oct. 17, 2017 announcement that First Eagle Investment Management (First Eagle) has entered into a definitive agreement to acquire NewStar for total consideration estimated at $12.32 to $12.44 per share. NewStar's unsecured debt rating of 'BB-' and subordinated debt rating of 'B/RR6' have also been placed on Rating Watch Evolving. As part of the transaction, NewStar will sell approximately $2.4 billion of middle market loans and other credit investments on its balance sheet to a fund sponsored by GSO Capital Partners, which is owned by The Blackstone Group L.P. (A+/F1). The transaction is expected to close in late 2017 or early 2018, subject to a 30 day "Go Shop" period during which NewStar will actively solicit alternative offers. A complete list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRS, SENIOR AND SUBORDINATED DEBT The Rating Watch Evolving reflects uncertainty as to the ultimate credit profile of NewStar, as First Eagle is a privately-owned investment firm that is not currently rated by Fitch and the fact that the transaction also includes a "Go Shop" period during which another party could make an offer for NewStar. Fitch expects that all rated debt would be repaid in full at-or-before the close of the transaction, as a result of change of control provisions within existing debt documents. Therefore, the debt is expected to be marked as paid-in-full and those withdrawn at the time of a transaction close. Based in New York, First Eagle is an independent, privately-owned investment firm with $116 billion in assets under management (AUM) as of Sept. 30, 2017. First Eagle plans to fund the merger with cash from its balance sheet, the assumption of a modest amount of existing debt related to the assets being purchased, and NewStar cash. Following the completion of the transaction, First Eagle plans to offer NewStar's middle-market and broadly-syndicated, liquid credit strategies to institutional and retail investors. In a related transaction, NewStar has entered into a definitive agreement to sell its balance sheet portfolio of investment assets, including approximately $2.4 billion of middle-market loans and other credit investments to a newly formed investment fund sponsored by GSO. GSO has obtained a commitment for a new $1.85 billion asset-backed revolving credit facility as well as $950 million of equity commitments from investors for the new fund sponsored by GSO. At closing, NewStar will enter into a servicing agreement with GSO, under which NewStar's current investment team will continue to service the portfolio of assets sold to the new investment fund. NewStar's current ratings reflect the company's established business as a direct middle-market lender, its well diversified portfolio of senior secured loans, demonstrated performance track record in middle-market credit, a modest but growing asset management platform, and experienced management team. NewStar's ratings have been constrained by its higher leverage relative to peers, reliance on secured wholesale funding, a weak but improving earnings profile, inconsistent strategic direction over time, and execution risk associated with its planned business strategy. These constraints are set against a backdrop of a highly competitive middle market underwriting environment, which could pressure asset quality and earnings performance in coming years. The alignment of the senior unsecured debt rating with NewStar's Long-Term IDR reflects Fitch's expectations for average recovery prospects in a stressed scenario. The rating of the subordinated debt at 'B/RR6' is two-notches below NewStar's Long-Term IDR, reflecting Fitch's assessment of the instrument's respective non-performance and relative loss severity risk profile. The two-notches represent incremental risk relative to the IDR, which is a function of increased loss severity due to subordination and heightened risk of non-performance relative to other (e.g. senior) obligations. RATING SENSITIVITIES IDRS, SENIOR AND SUBORDINATED DEBT Ratings could be upgraded if Fitch determines that the credit risk profile of First Eagle, or any other acquirer of NewStar, is higher than 'BB-'. Ratings could be downgraded if Fitch determines that the credit risk profile of First Eagle, or any other acquirer of NewStar, is lower than 'BB-'. Should Fitch be unable to form a credit view of First Eagle, or any other acquirer of NewStar before closing, the agency would expect to withdraw NewStar's IDRs ratings at their current level. If the transaction were not to close, Fitch would reassess NewStar's ratings in the context of its standalone operational, credit, and financial profiles. Fitch believes a termination of the acquisition transaction could cause management distraction, increase strategic uncertainty and pressure staff retention. As such, Fitch would likely view such an event negatively, contributing to at least a Negative Rating Outlook until more clarity was present. The ratings of the senior unsecured debt and subordinated debt are sensitive to changes in NewStar's IDR. The ratings of the senior unsecured debt are also sensitive to the level of unencumbered balance sheet assets available for unsecured creditors. A decline in the level of unencumbered asset coverage combined with a material increase in secured debt could result in the notching between the IDR and the senior unsecured debt. Founded in 2004 and based in Boston, MA, NewStar is a specialty commercial finance company with a focus on direct lending to U.S. middle-market companies. Through its asset management platform, NewStar also offers a range of investment products employing credit-oriented strategies focused on middle-market loans and liquid, tradeable credit. As of June 30, 2017, NewStar had managed assets of $6.5 billion, including $3.1 billion of loans and credit investments on balance sheet. The company's stock is traded on the NASDAQ under the ticker 'NEWS'. Fitch has placed the following ratings on Rating Watch Evolving: NewStar Financial, Inc. --Long-Term IDR 'BB-'; --Short-Term IDR 'B'; --Senior unsecured debt 'BB-'; --Subordinated debt 'B/RR6'. 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