Prospect Capital Snaps Up Fellow BDC

Sponsor: Prospect Capital Corp.

Target: Patriot Capital Funding Inc.

Value: $197 million

Financial Advisor: Target: FBR Capital Markets & Co.

Legal Advisor: Target: Sutherland Asbill & Brennan LLP; Sponsor: Skadden, Arps, Slate, Meagher & Flom LLP

The blood in the water around today’s faltering business development companies, or BDCs, could end up painting some as targets for their stronger peers.

Prospect Capital Corp. is one BDC that’s on the hunt. Earlier this month, the New York-based mezzanine debt and equity investor agreed to acquire Patriot Capital Funding Inc. for $197 million, including debt assumption, in a stock and cash deal.

Patriot Capital has been in default without forbearance from its lenders, creating a risk of lender foreclosure that would eliminate its equity value, according to an August 3 statement announcing the BDC’s acquisition by Prospect Capital. In April, one of Patriot Capital’s revolving credit facilities was terminated following a devaluation of the assets it provided as collateral. It was then that the Westport-Conn.-based Patriot Capital announced plans to consider strategic alternatives, including a sale of the business.

Prospect Capital said that the deal’s purchase price takes into account the repayment of all Patriot Capital debt, which is expected to be $110.5 million by the time the acquisition closes.

A representative of Prospect Capital declined to comment for this story, citing a quiet period the firm is under until the deal is consummated. Patriot Capital was not immediately available for comment.

BDCs in general have taken a beating in the recession, weighed down by the struggles of the small- and mid-sized companies they lend to and a dearth of exits that’s put a stranglehold on liquidity. Even the more prominent of the publicly-traded BDCs are experiencing tough sledding. American Capital Ltd. posted a $547 million loss for the second quarter on August 5 and remains in default on $2.3 billion of financings, while Allied Capital Corp. posted a net realized loss of $126.1 million for its latest quarter on August 10 and said it was reducing new investment activity to conserve capital and reduce outstanding debt.

The acquisition of Patriot Capital is the first deal in what could be the start of a broader trend of consolidation in the BDC universe. In March, Ares Capital Corp. CEO Michael Arougheti spoke at an industry conference about the need for consolidation among BDCs, according to, the sister Web site of Buyouts.

“Over time, consolidation is necessary to bring more efficiencies and get the sector moving in the right direction again,” Arougheti reportedly said at the time, noting that BDCs are scalable businesses and that lenders to the space would probably be open to whittling their exposure down to fewer managers.

Prospect Capital said the purchase price for Patriot Capital represents roughly 54 percent of target firm’s equity book value.

Since its founding in 2002, Patriot Capital’s primary business has been financing LBO-backed deals. According to its Web site, the firm most recently served as lead arranger of a $32.5 million debt placement to back DFW Capital Partners’s October 2008 recapitalization of Copernicus Group IRB, a provider of services for the biomedical research industry.

In the statement dated August 3, Prospect Capital said it hopes to use the acquisition of Patriot Capital to deepen its own presence in the financial sponsor marketplace. It also made its intentions known that it would pursue other strategic acquisitions as they become available.

“The Patriot acquisition is a perfect example of our previously stated strategy to go on offense in the current opportunity-rich marketplace in which competitors have faltered with overleveraged balance sheets,” said M. Grier Eliasek, President of Prospect Capital said in the prepared statement. He added that Prospect Capital is pursuing other “move-the-needle portfolio opportunities similar to Patriot.”

Assuming the deal closes under its current terms, Prospect Capital’s gross assets will increase by more than 35 percent and its equity capitalization will increase by more than 14 percent.

Prospect Capital CEO John Barry III, said in a statement that he hoped this acquisition would be the “first of what we hope will be multiple strategically compelling acquisitions to drive superior value to our shareholders.”

The deal is expected to close by early October.