U.S. shadow lenders see loan volume slow, quality decline

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The month of October brought some jumbo unitranche loans to the direct lending market. It also brought declines in the quality and terms of broader deals, according to some participants.

Private debt firms were tapped for at least two large transactions — a $1.6 billion refinancing loan for insurance brokerage Risk Strategies and a $788 million transaction for restaurant equipment maker Parts Town LLC. The deals are part of a trend toward bigger unitranche loans, which blend first-priority and subordinated debt into one, so the yield is typically higher than for the first-lien loan.

Still, Ares Capital Corp. saw a slow down in deal activity, Michael Arougheti, co-chairman of the firm's board said Oct. 30. The $14.5 billion private debt vehicle had been selected to lend about $665 million, and was working on a pipeline of about $265 million of potential deals, he said.

"While these levels are below average, we have seen a recent pickup in our activity and expect the typical year end push we usually see," Arougheti said on an investor call. "Furthermore, should the market experience similar volatility as we saw in the fourth quarter of last year, we could have a more active quarter than today's backlog and pipeline imply."

 October deals


Financing Size



Use of Proceeds

2018 Revenue*

Risk Strategies$1.6b
Golub Capital, KKR & Co., Goldman Sachs Group Inc.’s merchant bank, othersKelso & Co. LPRefinance debt$325.3m
Parts Town LLC$788m
(Talk: L+550)
Golub CapitalBerkshire Partners$534m
Certified Power Inc.$103.2mAntares CapitalBrinkmere Capital Partners$134m
Ned Stevens$133mTwin Brook Capital Partners, Audax Private Debt, Carlyle GroupAVALTBuyout
Cosmetic Solutions$90.5mTwin Brook Capital PartnersLee Equity PartnersBuyout$28m
 *According to PrivCo     

Falling quality

Though future deal flow signs are encouraging, quality and pricing are both on the decline, according to Tom Newberry, head of private funds at debt shop CVC Credit Partners.

"This is another indicator of late cycle behavior, where the easier deals have been done and you see tougher transactions," Newberry said. "The overall quality we've seen is not what we're accustomed to, but you can find good deals to do if you search and are more diligent."

Pricing on a true first-lien loan is typically around 550 to 650 basis points over Libor, down about 50 basis points from this time last year, according to Newberry.

In the middle market, where borrowers typically have $15 million to $50 million in Ebitda, lenders are struggling to fundraise in a competitive landscape, according to Albert Periu, chief executive officer of lower middle-market lender Neptune Financial Inc.

"There are people getting squeezed here," Periu said. "If you're not playing a differentiated story, you're having trouble right now."

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