LevFin Middle Market Insight: Unitranche still in bloom, Capital One latest to open platform

Unitranche lending continues to attract new providers despite sliding spreads amid increasing competition and insufficient supply. The latest platform to come online is from Capital One Healthcare, which this week announced a unitranche partnership with HPS Investment Partners.

The new platform may be the last entrant in 2016, but more providers are sure to surface throughout next year. For shops like Capital One, the ability to offer unitranche loans keeps the lender competitive, while the higher yields enhance returns. For giant platforms like Ares Capital, Antares Capital or Golub Capital, unitranches ensure lead mandates and significant allocations.

A growing pool of providers has driven down spreads in recent years, even at the lower end of the middle market.

Last month the tight end of unitranche spreads averaged L+800, down 50 bps over last year, and down 100 bps from November 2013, among businesses generating less than $7 million of EBITDA, according to SPP Capital Partners, a New York-based advisory and underwriting firm.

For companies with greater than $10 million of EBITDA, the tight end averaged L+650, down from L+700 last year. And for those with greater than $20 million of EBITDA, the bottom average has consistently hovered at L+600 over the past twelve months. 

Those spreads, along with a typical 1% floor and 99 issue price, still generate attractive yields for nonbank lenders, whose average cost of funds can run anywhere from 2.5% to 4.5%, generally. 

As more providers hop online, there is more interest from the buyside as well. Investors today say they are looking at unitranches as an avenue for booking better yields without soaking up the same kind of risk in second-liens.

Typically, unitranche credits run a quarter to half turn less leveraged than first-/second-lien structures, although multiples everywhere have shot up in recent years on even the smallest of borrowers.

In the less than $7M EBITDA bucket, SPP Capital data shows total multiples ranging from 3x to 4.5x, with the wide end moving from 4x a year ago. Larger names, obviously, can command higher multiples. A $250 million unitranche loan for QualaWash last quarter carried leverage in the 6x to 6.25x ballpark, against EBITDA in the $40Ms, according to sources.

Next generation

Competition also has driven unitranche commitments to new heights over the past year. Unitranches are no longer the domain of middle-market financing. The largest to date is the $1.075 billion loan underwritten in the third quarter for Qlik Technologies (LFI News: BDC filings shed light on unitranche pricing, holds for Marketo & Qlik LBO financings) by Ares Capital, Golub Capital, TSSP (a credit platform under the TPG umbrella) and Varagon Capital Partners. Marketo’s third quarter unitranche financing via Golub totaled $375 million.

Price-wise, sponsors behind those take-private deals paid up for scale, certainty of funds and no-flex language. Qlik cleared at L+825 with a 1% floor at 98.5, while Marketo closed at L+950, with a 1% floor at 98.5.

The top end average has hovered at L+750 over the past year for borrowers in the greater than $20 million of EBITDA bracket, according to SPP Capital.

Another unitranche financing with more heft for United Subcontractors cleared at L+1,000 via GSO Capital. Comparatively, a smaller facility for Wetzel’s Pretzels via Golub closed at L+675 at 97, with a 1% floor.

Antares Capital is in market now with a $300 million unitranche loan for Ansira Partners that’s talked at L+650 at 99 with a 1% floor. The L+650 spread is the same level that cleared on a $303 million unitranche that Antares arranged for SRP Companies (Solaray) in September. Total leverage was 5.3x at closing.

Ansira launched Nov. 30 and remains open for syndication. Some have skipped over the name in large part because of the hefty purchase price and debt load, according to sources. The digital marketing company is being acquired by Advent International at a 13.5x multiple, and is leveraged at 6.1x, sources say. 

Second-lien squeeze?

Heading into 2017, unitranche lending faces the issue of whether a return to second-lien underwriting will eat into volume amid robust market conditions.

It’s not yet clear whether the market is hot enough for sponsors to take on execution risk for greater leverage, and whether lenders are willing to underwrite second-liens at the larger end of the market.

Three LBO financings – Intermedia, Revspring and K&N Engineering – hit the syndicated market this quarter with first-/second-lien structures, and none were easy. Arranging the second-liens wasn’t an issue – all three were largely pre-placed, but first-lien accounts forced pricing higher on two of the three deals, the least leveraged of which is Intermedia, at 5.7x, and still in market. Revspring and K&N Engineering closed at 6x. – Kelly Thompson

To view the data associated with this story, please visit our website:  www.levfininsights.com