New Mid-Market Lender Looks To Tap Into Refi Boom

From the ashes of one mid-market lender rises another.

A three-man team including two co-founders of Freeport Financial LLC, a mid-market specialty lender that’s all but wound down its practice, have founded a new loan origination platform whose goal is to take advantage of the refinancing wave expected to the hit the middle market.

The new firm, CastleGuard Partners LLC, will focus on providing first lien senior secured loans to sponsor-backed companies with EBITDA greater than $10 million. The firm, which has an office on the outskirts of Chicago in Glenview, Ill., is currently in the process of securing long-term capital commitments from institutional investors.

CastleGuard Co-Founder Victor Viner told Buyouts that, as a new lender, the firm is at an advantage since it’s free of “legacy issues,” or exiting portfolio problems due to the economic downturn—a characteristic that’s likely to help with its capital-raising efforts. Prior to co-founding CastleGuard, Viner co-founded and served as CEO of Volaris, a multi-billion dollar option strategy firm that was acquired by Credit Suisse in 2003.

While CastleGuard will provide debt for new LBOs and even make opportunistic plays in the loan secondary market, “the big opportunity that we’re focused on is refinancing,” said Co-Founder Ian Fowler, who formerly helped found Freeport Financial. “In the large market, there has been a huge effort by companies to refinance leveraged loans with placements and high yield placements. That has not happened in the mid-market space.”

“When you look at the next one to five years, we figure there’s about $80 billion to $100 billion worth of loans that need to be refinanced in the middle market,” Fowler continued. “About 50 to 60 percent of that capital came from securitization market, which is gone—and even if it does come back, it’s going to take a long time.”

Typical deals for the firm will include senior credit facilities sized anywhere from $25 million to $200 million, with the firm holding between $10 million and $15 million of each issuance on its own balance sheet—possibly more if it serves as the lead the arranger.

“Given where we are in this market cycle, first-lien secured [debt] is a fairly safe and attractive asset class,” said Co-Founder Chad Blakeman, who, alongside Fowler, co-founded Freeport Financial. “Not only do you have collateral in case of a default, but the returns are far better than they have been over the past three to five years, and I think that provides ample opportunity for investors given the level of risk.”

The seeds for CastleGuard Partners were sewn in April 2009 when David Crumbaugh, a partner at law firm Latham & Watkins LLP, introduced Viner, a long-time friend, to Blakeman and Fowler.

To date, CastleGuard has not participated in any deals, though Fowler noted that the firm has been getting “a lot e-mails and calls from the private equity community rooting for us.” There are currently six full-time employees at the firm, including the three co-founders. Currently in the hiring process, it’s likely that CastleGuard will take on some former employees from Freeport Financial that were laid off earlier this year.

Freeport Financial was founded in 2004 with the backing of hedge fund manager Stark Investments. Most of the firm’s key players, including co-founders Blakeman and Fowler, were veterans of GE Capital, the lending arm of General Electric. In 2008, Freeport Financial stopped making new deals as Stark Investments looked to exit its investment in the firm. However, the auction process eventually fell apart, leading to Stark Investments’s decision earlier this year to wind down the firm. In February, Freeport Financial laid off most of its 23 employees, leaving only a core group to tend to the lender’s existing portfolio.