Babson Capital Makes Return To Senior Debt

A return to senior lending marks a major move for Babson Capital, a unit of Massachusetts Mutual Life Insurance Co. A previous incarnation of the business, known as Antares Capital, launched by the insurance company in 1996, was sold in October 2005 to GE Capital Corp. and today remains one of the largest providers of credit facilities for mid-market deals.

The firm plans to announce this week that it has hired a team to anchor its new Middle Market Lending Group, which will be based in Chicago. Michael Hermsen, managing director and head of Babson Capital’s Global Private Finance Group, said the firm is responding to market demands.

“The sponsors we’ve had relationships with have been saying to us for years, you guys need to get into senior lending,” Hermsen said. The firm itself also saw the need, with banks and other lenders pulling back from leveraged lending. Following a strategic review that began a year and a half ago, the firm came “to the conclusion that the middle market, particularly deals brought to us by the sponsor network we have developed, is a very attractive place to put capital,” Hermsen said, “We’ve been making a concerted effort to rebuild that operation.”

Babson Capital has hired three investing pros to spearhead the new group, naming Ian M. Fowler, Brian C. Baldwin and Mark J. Flessner to be managing directors of the new team. They previously worked together as principal investors for Freeport Financial, another leveraged lender in Chicago that Fowler helped to found in 2004. Each also worked at GE Capital’s Global Sponsor Finance Group.

“It’s a small community in the middle market world. We’ve been in this space for a long time. Mike and his group have been in this space for a long time. It’s a great match to put our combined skill sets and relationships together,” Fowler said.

The Middle Market Lending Group plans to focus on companies with enterprise values of $35 million to $500 million or EBITDA of $10 million to $50 million. The majority is likely to be lower mid-market, less than $25 million EBITDA, even less than $10 million, Fowler said, although this team will be positioning itself somewhat upmarket from Babson Capital’s mezzanine finance group.

One key resource will be the backing of Mass Mutual, which had $443 billion under management at the end of 2011. “You can have relationships and the sophistication and the back office, but if you don’t have the funding source in this market, you don’t have much.”

Mass Mutual has dedicated a “significant amount of capital” to support the new venture, Hermsen said, although he would not specify say how much. “Babson Capital is always going to be a significant provider of capital to this asset class.”

Babson Capital may raise additional capital later this year for the mid-market team, perhaps in the form of separate accounts, structured products or a fund format, but Hermsen said that investor needs would “determine exactly what the structure should be.”

Sponsor finance “will be the focus of the strategy,” but the firm will be open to unsponsored deals and perhaps some operational stress in portfolio companies, but “not a lot,” Hermsen said. The mid-market group also will consider secondary transactions, such as refinancing, recaps, but not the core of the strategy. “We’re going to be as opportunistic as possible.”

Separately, Babson Capital announced the formation last week of an energy finance group, which will focus on mezzanine debt and equity investments in energy and infrastructure projects. Brian Daly, a former managing director and senior portfolio manager of the TCW Cogeneration and Infrastructure Fund, will lead a team of four for that New York-based group.