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Start-up Senior Lender Fires One-Third Of Staff

FirstLight Financial, a lender specializing in arranging senior debt for mid-sized LBOs, has fired roughly one-third of its 65-person staff, Buyouts has learned.

The less-than-one-year-old firm got caught flatfooted after building a business model that presumed a thriving market for loan syndication—a market that dried up after last summer’s the credit crunch. The layoffs span the entire spectrum of personnel, from managing directors to lower-level staff members.

A person close to the firm described the layoffs as a necessary “right-sizing” in light of the credit crunch gripping the entire financial sector. He said the move doesn’t mean the lights are going out for the firm. “It’s a good time to be a lender if you have the capital, and [FirstLight has] the capital,” he said. The firm is “open for business and still arranging and making” loans.

The Old Greenwich, Conn.-based firm officially started in April, backed by consumer-focused LBO shop Catterton Partners and Ares Capital Corp., the business development company managed by Los Angeles-based Ares Management.

Led by Ron Carapezzi, a former top finance executive at General Electric Co., FirstLight Financial constructed its business model largely on a foundation of collecting fees for arranging and managing the syndication of senior loans. The firm has kept on its balance sheet between 25 percent and 30 percent of the value of the loans it’s arranged, according to our source. The remainder was sold off to other investors in arranged deals.

In the last six months, however, the syndication market has largely evaporated due to the disappearance of collateralized loan obligations and diminished appetite from other buyers. “Top-heavy” debt providers, so called because they require large numbers of people to drum up syndication business, faced difficulty. Underscoring the difficulty, many of these firms came into being during the last cycle, when a pronounced borrower’s market forced new entrants to be aggressive with pricing and terms. Like FirstLight Financial, Cratos Capital late last year also laid off a large portion of its staff and shut down one of its satellite offices.

Meantime, mid-market lenders with ample balance sheets capable of holding big slugs of debt have thrived. Credit spreads and covenants are as favorable as they’ve been since 2003. And the surviving lenders can be extremely choosy about the LBOs they want to back.

The source close to FirstLight Financial denied that the firm’s business model relied too heavily on fee income from arranging and syndicating loans. Our source pointed out that the firm has the capacity to take on more than the usual 25 percent to 30 percent of a loan agreement it arranges. In addition, FirstLight Financial has bought up roughly $300 million in senior loans on the broadly syndicated debt market. There, too, prices and yields have been favorable to firms with capital to deploy.

The size of Catterton Partners’s stake in FirstLight Financial is unknown. But Ares Capital Corp. has invested more than $100 million through a combination of subordinated debt and equity, according to the firm’s quarterly filing for the period ending Sept. 30. The investment represents nearly one-tenth of Ares Capital’s $1 billion market capitalization (as of Jan. 25). The debt commitment of $63 million is the single largest loan in Ares Capital’s portfolio, and the $40 million equity commitment is also the largest of its kind in the portfolio, according to the regulatory filing.