Direct Lending Poised to Pick Up as Private Equity Deals Mount

(Bloomberg) -- U.S. direct lending activity is expected to pick up amid a swelling private equity M&A pipeline and as borrowers seek to wrap up financing before the end of the year.

Lending is lagging last year’s breakneck pace, but there are “encouraging signs” that a long-anticipated increase in deal flow will materialize, according to Michael Ewald, global head of Bain Capital Credit’s private credit group. That view is based on the level of sell-side advisory activity currently in the market, he said.

Borrowers that aren’t private-equity owned will also seek to wrap up financings in the last quarter, so they can begin the new year with capital for their growth ambitions or acquisitions, said Darius Mozaffarian, partner at White Oak Global Advisors.

Volumes are falling short of last year’s tally as the market slowly rebounds after volatility late in 2018. September’s transactions were largely driven by health care, business services and software deals. Deals included a $220 million facility for the acquisition of health-care software company Ontario Systems and a $75 million unitranche for Avista Capital Partners’ buyout of GCM, a provider of machining to the medical technology industries.

September Deals

BorrowerFinancing SizeLender(s)Sponsor(s)Use of Proceeds
Joe Hudson’s Collision Centers$290mAntares, Bain Capital Credit joint ventureTSG Consumer PartnersAcquisition of Joe Hudson’s by TSG
Ontario Systems$220mNXT CapitalNew Mountain CapitalAcquisition of Ontario Systems by New Mountain
GWS Tool Group$74mVaragon Capital PartnersL Squared Capital Parnters


add-on acquisitions

PCF Insurance$90mMadison Capital FundingBHMS InvestmentsAdd-on acquisitions
GCM$75mVaragon Capital PartnersAvista Capital PartnersAcquisition of GCM by Avista

Downturn Prep

Borrowers in the direct lending market are also anticipating a time when debt may not be as readily accessible, by negotiating more delayed draw and accordion features on their deals, according to Mozaffarian.

“This way they’re preparing for a financing market that may not react well to a great macroeconomic event,” he said.

For their part, investors are exercising a touch more caution amid uncertainty around the Federal Reserve’s monetary policy and other geopolitical factors. They’ve been tentatively pushing back on terms in credit documents, seeking stronger limits on Ebitda addbacks and smaller carve-out baskets, Mozaffarian said.

In terms of deals, more second-lien facilities are being privately placed before broadly syndicated first-lien deals are offered, according to Bill Sacher, partner and head of private credit at Adams Street Partners. Ascensus Specialties, Autodata and DigiCert were among the issuers to come to the broadly syndicated loan market with privately-placed second-lien tranches in September.

“Locking in the second-lien portion of the capital structure helps build momentum for the first-lien syndication, establishes a benchmark for pricing on the first lien, and eliminates a significant amount of the market risk,” Sacher said. “Private equity sponsors also appreciate the comfort of knowing they have relationship-oriented lenders in the second lien that are likely to hold the paper for the life of the deal.”

©2019 Bloomberg L.P.

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