US mid-market: lenders try to fill void left by Antares

When General Electric announced plans to sell its private equity lending business to the Canada Pension Plan Investment Board for $12 billion this year the US mid-market buyout industry was thunderstruck. The removal of Antares Capital from the segment seemingly threatened to remove one of the biggest pipelines of senior debt in North America but, in fact, has helped pave the way for new sources of financing to emerge.

“GE’s exit from mid-market private equity lending has been a catalyst for change,” says Lawrence Golub, chief executive of the eponymous asset manager which oversees two business development companies (BDCs) and more than $15 billion in assets.

“GE’s was the last bank active in the space and because they had unlimited access to overnight funding they were able to compete by over-sizing revolvers.”

That may have been the case, but Golub Capital and other publicly-traded BDCs, including Ares Capital, Apollo Investments, Fifth Street Finance, Monroe Capital, Tennenbaum Capital Partners and THL Credit Advisors, came forward to finance mid-cap buyouts.

At the same time, leverage levels have risen amid a lofty purchase multiple environment and low interest rates. Mid-market senior debt multiples rose to 5.5x EBITDA in the third quarter of 2015, compared with 4.1x in Q2 and 4.6x in Q1, according to S&P Capital IQ.

The increase raises the spectre of credit risk and defaults spreading outside of larger financings in the energy and mining industries as economic growth has slowed. However, it’s the higher capital requirements that regulators have imposed on banks – restricting borrowing for deals to a maximum of six times EBITDA – that seem to be putting a brake on the amount of debt arranged.Total private equity sponsor volume for mid-market companies with $50 million or less in annual EBITDA totals $7.1 billion in the year to date, compared with $8.7 billion in 2014, according to S&P Capital IQ.

Some market participants don’t see much of a difference in lending activity. Howard Lanser, managing director and head of debt advisory at Robert W. Baird & Co, says: “While the guidelines are there, I can’t tell you that they are definitely making a major impact on the financing of our middle market deals from lenders focused on the middle market.”

Meanwhile some financing market participants point to something else as the industry’s biggest development in 2015. William Blair’s latest quarterly survey of mid-market leveraged finance professionals at commercial banks, credit funds, BDCs, commercial finance companies and other credit providers found that 56 percent of respondents thought the proliferation of new private funds in the market was the year’s most important development, followed by 33 percent who felt the impact of regulation was the biggest factor.

As NewSpring Mezzanine managing partner Andrew Panzo says of the current debt environment: “This is a very interesting time in the mid-market on the leverage side.”