September 17, 2015 / 4:15 PM / 4 years ago

TRLPC: Sponsored middle market dealflow sees post-Labor Day boost

NEW YORK, Sept 17 (Reuters) - 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 covenant-lite loans.

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 press release.

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 banker.

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 quarter. (Editing By Tessa Walsh and Jon Methven)

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