When Tim Clifford worked up his business plan for a team that would finance mergers and acquisitions of small companies, he didn't think of shopping the idea to a regional bank — much less one that was founded by a labor union in the 1920s.
Headquartered near New York's once-bustling garment district, Amalgamated Bank wants to lend money for mergers and buyouts of small and middle-market companies. Last week the $4.6 billion-asset bank helped finance a private-equity firm's investment in a medical device company.
Amalgamated joins a growing number of small banks looking to finance transactions in a market long dominated by giants like Bank of America Corp. and Wells Fargo & Co. The funding is welcome to private-equity investors whose traditional sources have dried up during the credit crisis. Longtime bank participants are licking their wounds and cleaning up balance sheets, so they are lending less, and a major source of money for the buyout world — collateralized loan and debt obligations — has been running on fumes.
For the newcomers, leveraged finance can be a healthy source of fees.
"Initially, I'd targeted larger, mid-tier institutions on a national level," recalled Clifford, who was a managing director at Churchill Financial, a specialty finance company in New York, before sketching out and selling his idea to senior executives at Amalgamated.
Amalgamated, which calls itself "America's Labor Bank," hired Clifford in September. His lending team of three professionals, known as Amalgamated Capital, can offer to lend $5 million to $60 million to bidders for companies valued at up to $150 million.
Clifford's team aims to generate risk-adjusted returns of 8% to 10% through loans to businesses in several industries, including consumer, distribution, education and health-care. Poor liquidity has created "a wonderful opportunity to take advantage of a market in need," he said.
The need became more acute recently with the bankruptcy of CIT Group Inc., a specialist in financing a wide range of midcap businesses.
Besides Amalgamated, the $13.6 billion-asset Susquehanna Bancshares Inc. in Lititz, Pa., and TriState Capital Bank, a $1.36 billion start-up in Pittsburgh, have entered the leveraged buyout market.
When ICV Capital Partners LLC in New York bought a majority stake in the investment advisory firm PFM Group in May, it tapped the two Pennsylvania institutions for senior debt financing.
Tarrus Richardson, a managing director at ICV, said it funded the purchase for about 525 basis points above Libor, the London interbank offered rate, which is less than traditional middle-market finance providers would have charged. The deal had a conservative capital structure — 70% equity and the remainder debt.
"Some of the regional banks see an opportunity to get very attractive pricing on conservative financing structures," said Jack Glover, a partner at PNC Equity Partners, the private-equity arm of PNC Financial Services Group Inc. in Pittsburgh. PNC Equity focuses on companies valued at $25 million to $150 million.
Glover turned to the $68.9 billion-asset M&T Bank Corp. in Buffalo to recapitalize a PNC Equity portfolio company, Griffith Energy Inc., a propane and heating oil distributor in Rochester, N.Y.
Griffith's majority-owner used $80 million in new debt for two purposes: to pay down an older loan that had been used to buy Griffith and to pay a special dividend to PNC Equity, which earned back 1.5 times its investment.
"You don't find many $5 billion commercial banks that have the attributes that are applicable to run a successful leveraged finance business," Clifford said.
Banks and specialty lenders that had long supplied cash-flow loans have stepped back in order to focus on stabilizing their own businesses. In addition to CIT, Allied Capital Corp. stumbled in the credit crunch; it was recently sold to Ares Capital Corp. of Los Angeles for $648 million. General Electric Co.'s GE Capital Corp. is said to have slowed down its lending because it was burdened with a large commercial real estate portfolio.
For regional banking companies, the potential returns are attractive. Middle-market senior loans, for example, command 500 to 600 basis points above Libor, bankers say.
During private-equity's heyday, 2005 to 2007, big companies like Bank of America and JPMorgan Chase & Co. held sway in middle-market LBO lending. They were joined by specialty lenders that jockeyed to arrange syndications for midsize buyouts. The better-known players included CapitalSource Inc. (which chartered a commercial bank last year), GE Capital and Madison Capital Funding.
As the credit crunch took hold, however, most banks and specialty lenders retreated from the debt markets. Loan issuance remains largely moribund this year. Issuance of leveraged loans, for example, fell 40% in the first nine months, according to Fitch Inc.
The chance for regional banks to add business lines and take market share from traditional cash-flow lenders became more apparent in the weeks after CIT's bankruptcy. The backbone of that company's business was arranging debt for small and midsize businesses, including billions of dollars in cash-flow loans for private-equity firms. CIT was the No. 3 middle-market lender by number of deals this year, just ahead of PNC and Wells Fargo, according to the data provider PitchBook.
CIT, though, has not been active in arranging new debt since July. It is not expected to engage in new lending until it emerges from bankruptcy. The company filed for bankruptcy court protection from creditors on Nov. 1, with the goal of completing a workout in 30 to 40 days.
CIT's bankruptcy was timely for regional banks stepping into the middle-market LBO finance business, according to Jeff Kilrea, a managing director in the commercial finance group at CapitalSource, which has financed $400 million of middle-market loans this year.
"They can step in and fill that liquidity hole that CIT may be giving up," Kilrea said. "Some of those institutions are not saddled with an existing credit book that they have to worry about. They appear to be entering at the right time of the cycle."
Fifth Third Bancorp announced its foray into the middle-market finance business just days before CIT's filing. The $111 billion-asset Cincinnati company's private-equity lending platform will provide senior debt for companies generating $10 million to $50 million in cash flow. It hired former CapitalSource banker Brian Crabb, as well as Josh VanManen, who previously worked in Fifth Third's structured finance group, to spearhead the effort.
