Bear Stearns, Churchill Form New Debt Group –

Consolidation and the increasing size of buyout deals has left a void in the senior and mezzanine debt financing market, according to the founders of Churchill Financial Holdings, a New York-based middle market commercial finance company that announced its formation last week. The new group was founded by Bear Sterns Merchant Banking (BSMB) and Churchill Capital and will target private equity firms and other middle market investors.

Churchill Financial has a total of $500 million in committed capital. Half of that comes from BSMB, Churchill Capital, hedge fund DB Zwirn & Co., hedge fund-of-funds Private Advisors and the new firm’s management. Another $250 million comes from a warehouse facility provided by CDC-IXIS. With credit lines in place, Churchill Financial will have access to up to $1.5 billion in funds.”

Churchill Financial is the brainchild of CEO Ken Kencel, who joined Churchill Capital last year with the specific goal of starting a finance company that would focus on senior debt. He previously headed leveraged finance at the Royal Bank of Canada (RBC). He also headed Indosuez Capital and is a veteran of Drexel Burnham and Chase Manhattan.

Kencel has been a first-hand witness to investment banks’ migration to larger deals. He left RBC after it moved away from the middle market and toward big buyout deals. He says he found that Churchill Capital’s ideas about serving the middle market were the same as his. “Once you have a company that has $30 million, $40 million and $50 million of EBITDA, everyone wants to finance your deal,” says Kencel. “On the $5 million to $10 million EBITDA side, it’s difficult to finance. It’s a very different dynamic.

Churchill Capital President and CEO Mike Hahn says that private equity firms have been losing out as a result. “There has clearly been a void left by banks consolidating and lending on a more conservative basis,” he says. “Private equity firms have had to contribute more equity than they probably would like and are getting less senior debt than they deserve. There has been a gap for some time and we don’t see that changing.”

Kencel and Hahn declined to specify the investments made by Churchill Capital, BSMB and the others. BSMB Senior Managing Director David King says in the announcement that the growing private equity market will continue to create demand for more middle market LBO financing and that BSMB will work with Kencel and his management team.

Churchill Financial, which will be independent of Churchill Capital, will join a small club of middle market senior debt providers that includes GE Antares Capital, Merrill Lynch and Madison Capital Funding. The nature of senior debt financing allows for a lot of collaboration with competitors, according to Hahn and Kencel. “There are really only half a dozen firms that do that business and you need two or three of them to partner up,” says Kencel. “It’s very much a club market. We expect to lead our share of deals but also participate in deals led by others.”

New entrants are entering smaller niche markets like middle market financing due to the evolutionary cycles within the banking industry, Kencel says. What will set Churchill Financial apart, Kencel says, is its more exclusive focus on small market buyouts by private equity firms.

“It’s going to be healthy for the private equity community,” says Hahn. “They can go out and get multiple bids on a transaction.”

Kencel is joined by COO George Kurteson, a former GE Capital and GE Antares Capital executive and Chief Administrative Officer Alastair Merrick, former CFO and director of operations with IBJ Whitehall. The new firm expects to announce this week that former JP Morgan Chase executive James Nathenson will join the firm as chief credit officer.