NewStar to boost lower middle-market loans after Franklin Square investment

  • BDC to get $300 mln in fresh capital
  • Franklin gets subordinated notes, warrants
  • Blackstone’s GSO unit is sub-advisor to Franklin

Proceeds from the deal will be used by NewStar to originate and lead transactions, thereby increasing volume and asset growth. GSO Capital Partners, the credit arm of Blackstone Group, is involved in the deal through its relationship as a sub-advisor to Philadelphia-based Franklin Square.

The injection of capital resembles a growth equity investment given the warrants Franklin Square will receive as part the loan it provides to NewStar. If NewStar’s business grows and its share price advances, Franklin Square would benefit. Franklin Square would also refer clients looking for smaller financing packages to NewStar.

The capital will be deployed in NewStar Financial’s lower middle-market loan portfolio, typically holding loans of $5 million to $35 million and underwriting up to $100 million. Companies in NewStar Financial’s loan portfolio typically generate $5 million to $30 million in EBITDA.

NewStar Financial operates in a wide variety of target industries including business service companies, consumer products, environmental companies, media companies, retailers and transportation companies. Among the deals it has done this year, NewStar led a $670 million senior secured credit facility for TGI Friday’s, a portfolio company of Sentinal Capital Partners. It also provided $5.75 million in senior secured credit facilities for Krave Jerky, a portfolio company of Alliance Consumer Growth.

“NewStar Financial has great private equity relationships and a strong credit track record, making them an ideal partner,” said Sean Coleman, managing director, investment management, at Franklin Square. He added that the new capital will enable NewStar to “expand their relationships with sponsors.”

GSO and Franklin Square said the deal will indirectly boost their access to lower middle-market loans and allow them to offer portfolio companies equipment lease financing and asset-based loan products through NewStar.

Funds managed by Franklin Square plan to buy 10-year subordinated notes and warrants exercisable into 12 million shares of common stock at a price of $12.62 per share in NewStar, which is publicly traded on the Nasdaq. The shares amount to more than a 20 percent stake in NewStar, if exercised. The deal is expected to close by the end of the year. 

Coleman and Michael Gerber, executive vice president, administration and public affairs for Franklin Square, said the $300 million injection may last one to two years.

“GSO and Franklin Square, separately, may also consider investing additional capital in future lending vehicles managed by NewStar,” according to a statement from NewStar.

Founded in 2007, Franklin Square launched the industry’s first non-traded business development company. It managed about $12.4 billion in assets as of June 30. Franklin Square’s public BDC, FS Investment Corp, trades under the symbol of FSIC. The stock has traded between  $9.87 and $10.78 in the past year, according to Reuters data.

(This story has been corrected to fix a wrong stock price for FS Investment Corp.)