Babson Consolidates 5 Mid-Market Lending Units

  • Building a unified global lending business
  • Playing up and down the capital stack
  • Plans for a customized account business

Babson Capital Finance combines five existing business units, including private finance, under one umbrella. They include the mezzanine group that Babson Capital Management has operated since 1998; the mid-market lending group in Chicago, launched a year ago with three lending pros and is now up to five, with plans for seven by year-end, Hermsen said; a mid-market energy finance unit, also launched a year ago; and mid-market lending businesses in Europe, based out of London, and Asia-Pacific, with offices in Sydney and Hong Kong.

“We continue to believe the middle market in the United States, as well as Europe and Asia, is underbanked,” said Mike Hermsen, managing director of Babson Capital Management, who has been named as CEO of Babson Capital Finance. Hermsen will report to Tom Finke, CEO and chairman of Babson Capital Management. Finke will also serve as chairman of BCF’s board of directors.

“We plan on establishing Babson Capital Finance as a leading global finance company serving middle market companies, especially those backed by financial sponsors and in certain specialized industries,” Finke said in announcing the launch of the new business.

Banking reforms such as the international Basel capital standards and the Dodd-Frank financial reform law in the United States are driving traditional bank lending away from riskier lending and they are even selling lending units as a way to increase their regulatory capital, Hermsen told Buyouts. “We feel we’re pretty well situated to step in and fill that void.”

The combination provides global capability, from senior secured cash-flow loans all the way to the most junior tranches of the equity stack, even a slice of equity exposure, Hermsen said.

The company will generally look for a hold size of $10 million to $50 million for its mid-market loans. Conditions in the lending market now are quite accommodating, largely because of a slow start to dealflow this year. This has led to an increase in aggressive structures such as covenant-lite loans, Hermsen said. “The percentage of deals outside our comfort zone has increased.”

But dealflow has picked up in recent weeks, a trend that Hermsen said he sees continuing to accelerate. “The rest of the year is going to be very busy.”