- BDC manager launches senior floating rate firm
- Becomes third BDC with dual-company structure
- Has historically invested in mezzanine debt
Fifth Street, of White Plains, New York, has launched a second business development company to lend to buyout-backed companies. The new BDC, Fifth Street Senior Floating Rate Corp, went public in mid-July with a mandate to invest in senior debt, rather than junior capital.
In announcing the IPO, which raised more than $100 million at a public offering price of $15 per share, the company said that Fifth Street Senior Floating Rate will invest in senior secured loans, including first-lien, unitranche and second-lien debt, which would pay interest based on a floating lending rate. Target investments will be in mid-market companies generating EBITDA of $20 million to $100 million.
As the new BDC said in its prospectus, “Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors.”
Fifth Street’s existing BDC, Fifth Street Finance Corp, concentrates more on mezzanine finance and other forms of junior capital; it is one of the largest players in its category, with a balance sheet of more than $1.8 billion.
Only two other BDC managers operate with such a dual-company structure, said Troy Ward, an analyst at Stifel Nicolaus & Co, the St. Louis-based investment bank. The managers at PennantPark Investment Corp launched PennantPark Floating Rate Capital in April 2011, while executives at Solar Capital Ltd launched Solar Capital Ltd. 6.75% Senior last December.
In both cases, the second structure was set up in order to provide investors with a vehicle to invest in more senior, less risky, parts of the capital structure, Ward said. Although BDCs were established by law to be providers of mezzanine financing for LBOs, their managers have a good deal of latitude about investment decisions.
Ward compared Fifth Street to Golub Capital, another mid-market lender that launched a BDC in April 2010. Golub Capital also manages a number of private funds to support its lending, Ward said. “The manager has the ability to manage multiple buckets of money.”
But the establishment of a senior lending BDC may be easier for investors to understand, Ward said. “You get less liquidity, but higher yields, in a regular way BDC. You get more liquidity but lower yields in a senior BDC.”
The floating-rate feature of such lending vehicles provides some protection to investors against the risk of rising interest rates, Ward said.
Fifth Street did not respond by deadline to Buyouts requests for comment.