Leveraged Loan Market Heats Up in Chicago

Leveraged lenders are ramping up for an expected surge of buyouts later this year.

Established players such as GE Antares Capital are hiring additional staff to prepare, while commercial lenders such as Harris Bank are putting new emphasis on private equity sponsors and newcomers such as NXT Capital LLC are coming to market to try to catch some of the business. “Our pipeline is as robust as it has been since the middle of ’07. Deal flow is really solid right now,” said John G. Martin, GE Antares president and chief executive officer, in an interview.

The deal market has already begun to snap back sharply this year after a two-year slump. Capital IQ, a research tool owned by Standard & Poor’s, reported last month that private equity LBOs in the United States jumped $27 billion in the three months between March and May, compared to previous three months. Lenders say they anticipate a strong second half in 2010, as business owners decide to sell ahead of an expected increase in capital gains tax rates next year.

In anticipation, the middle-market lending specialist GE Antares, a unit of GE Capital Corp., plans to add 15 to 20 jobs this year in its risk management area, to go with the 70 professionals there now. The firm also plans to add two to four professionals to its capital markets business, where some 18 pros work now, Martin added. The only area where GE Antares does not plan to add staff is in it origination unit, where 25 professionals work now.

This is the first time in more than two years that GE Antares has added staff, Martin said. Since the firm acquired Merrill Lynch Capital in 2008, picking up that company’s private equity sponsor financing business, it has been reducing headcount, both for efficiency and as a result of the economic slowdown of the last two years.

With the purchase of Merrill Lynch Capital, GE Capital positioned itself as a leader in mid-market LBO debt financing. But the deterioration of markets through that year and into 2009—Lehman Brothers collapsed in September 2008—brought deal-making to a standstill. But all that has begun to change. GE Antares, for example, is willing these days to offer stapled financing to selling sponsors, positioning the firm to lead the transaction to the next buyer in sponsor-to-sponsor transactions.

GE Antares also is seeing good interest in its Senior Secured Loan Fund LLC, offered in conjunction with the mezzanine lender Ares Capital Corp., Martin said. The financing, formerly known as the Unitranche Fund, is designed to be a one-stop financing package, eliminating the need for inter-lender agreements or “flex” financing that can complicate deals, Martin said. “You get not necessarily the level of leverage in a three-party deal, but pretty darn close.”

Meantime, Merrill Lynch Capital alumni are now turning up at competing shops, as non-compete periods expire and the market warms up. Many of them also have connections to Chicago’s old Heller Financial, acquired by GE Capital in 2001, making the Midwestern city something of the epicenter of leveraged lending.

Harris Bank of Chicago, a unit of Bank of Montreal, has brought in a team of lenders who specialize in working with sponsors. Daniel Marszalek, formerly the managing director and head of corporate finance at Merrill Lynch Capital and a 17-year veteran of Heller Financial, was named managing director of Harris Commercial’s financial sponsor-related activities and its asset-based lending business, according to June press release.

Also at Harris Bank are Dennis Robleski, its managing director of sponsor finance, who held similar titles at Merrill Lynch Capital and Heller Financial, and Stephen Isaacs, now also a managing director at Harris Bank, who formerly was the director of corporate finance at Merrill Lynch Capital. Harris Bank, which has about $30 billion in assets, has offered corporate finance products for many years, but the emphasis on sponsor finance is new, Marszalek said in an interview. “We’re making it a core focus of the institution.”

Other Merrill Lynch Capital veterans are involved in a startup, NXT Capital LLC, which launched in May with backing by buyout shop Stone Point Capital LLC of Greenwich, Conn., and the capacity to finance $1 billion in transactions, in corporate finance and real estate deals.

CEO Robert Radway, the former President of Merrill Lynch Capital, is joined at NXT Capital by Mike Litwin, who had been chief credit and risk officer Merrill Lynch Capital, and Neil Rudd, who had been its CFO. Radway, Litwin and Rudd together founded Merrill Lynch Capital in 2002. Radway predicted a surge of “virgin deals,” involving sellers of family-owned businesses that have not been involved in buyouts before.

The new firm’s corporate finance and real estate segments each has $1 billion in prospective transaction flow, and Radway said he anticipated that 10 percent to 20 percent of those deals would close in the next 60 to 90 days. “The second half will be stronger from a deal-flow point of view than all of last year and most likely the first half of this year,” Radway said. “It is still a far cry from the level of activity that we saw in 2006 and 2007. We’ve got a long way to go before we reach that level of activity again.”