By Randy Schwimmer
When your correspondent began distributing middle market loans (in the waning days of the Reagan administration), the concept was considered novel. Back then money-centre banks underwrote and syndicated mainly large corporate loans to other relationship banks. Smaller deals were mostly self-arranged, club affairs among regional banks and finance companies.
Even when leveraged lending picked up steam in the early 1990s, and LBO paper found interest among institutional buyers, loan distribution involved mostly tranches over $250 million. Those loans had sufficient scale that funds needing liquidity would find a ready secondary market.
Syndicating middle market loans was akin to making a private placement. Lenders would have established ties with the borrower. If our firm was selected to lead a transaction, our first calls would be to those banks. We’d send them a proposed term sheet and work to find common ground on pricing and structure.
As sponsor finance evolved, a more varied assortment of buyers came down market in search of higher yield and better structures. Finance companies like Heller, GE and CIT began to build syndication teams. They recognised that if they were to sell small, unrated credits, lenders demanded primary due diligence, such as site visits and meetings with management.
As the opportunity in the middle market became evident, arrangers built lists of midcap loan buyers, hiring bankers to originate loans to feed those accounts. GE, Antares, Heller and Merrill Lynch Capital merged to form GE Antares and dominated the business. While banks still syndicated middle market deals, GE and others focused on this segment with strong origination from top private equity firms. These arrangers also held significant shares of the broadly syndicated loans, rather than selling down their exposures to zero, as banks typically did.
Today, the world of middle market loan underwriting is changing dramatically. The regulatory climate is a major factor: US leveraged lending guidance is pushing banks out of the game. At the same time, the lines are blurring among credit products and providers. Rather than investing in only senior debt and having the sponsor source the junior capital, arrangers are speaking for all the debt.
In addition, the unitranche – an all-senior facility that offers the same leverage as a senior and mezzanine structure – has grown in importance. Developed as a credit solution when syndication markets went offline, the unitranche has become an all-weather financing, eliminating the uncertainty of market flex and inter-creditor issues.
Finally, non-regulated entities are bulking up by adding side-pockets of capital – allocating portions of the loan among multiple funding vehicles. Firms such as Golub, Ares and American Capital can speak for increasingly large commitments, and hold much if not all of the paper. As a result, the size of deals being held by one provider has grown dramatically. Until recently loans above $100 million required at least two or three lenders; today, that figure has mushroomed to $250 million.
With more than $42 billion of middle market loans sold last year, the syndications game isn’t going away. But as more managers write bigger cheques, the playing field is certainly changing.
Randy Schwimmer is senior managing director and head of origination and capital markets at Churchill Asset Management, a newly formed credit asset management firm affiliated with TIAA-CREF Asset Management. He is also founder and publisher of The Lead Left (theleadleft.com), a weekly newsletter about trends and deals in the capital markets.
This column first appeared in the weekly newsletter of Creditflux, a leading global information source for the credit trading and investment market.