Are CLOs Back? Chicago Debt Shop May Try One

Startup lender NXT Capital LLC may try this summer to float a collateralized loan obligation, taking advantage of a leveraged loan market that continues to strengthen.

“It’s our expectation that the market will continue improving this year, with issuers coming back with the expectation of CLOs permanently funding their assets,” said Robert Radway, NXT Capital’s chairman and CEO.

The CLO business dried up in 2008 and 2009 as a result of the credit crisis that parched markets around the globe. Although some transactions have taken place in the past year, mostly recycling cash from existing CLO loans being repaid, observers have been watching for the return of CLOs as a harbinger of healthier credit conditions.

The Chicago-based firm, launched last April with backing from Stone Point Capital of Greenwich, Conn., also is broadening its focus, with the launch in December of a team to focus on cash flow lending in the health care sector led by Managing Director David Allen and Vice President Joseph Gambino. Allen was a co-founder of Freeport Financial, where he led the firm’s health care practice, and has 18 years in mid-market finance for firms including City National, Heller Financial, and GE Capital. Gambino has more than 10 years of mid-market lending experience at Freeport Financial and GE Capital.

“We are continuing to build out our footprint in the deals that we do and the industries that we focus on,” said Radway.

NXT Capital participated in 35 lending deals in 2010, focusing on two areas: mid-market leveraged lending, mostly sponsor deals, and commercial real estate, said Radway, who led Merrill Lynch Capital from its inception in 2001 until its sale to GE Capital in 2008.

The firm primarily underwrites senior loans to buyout-backed companies generating $5 million to $50 million in EBITDA. The firm generally seeks to hold positions of $15 million to $40 million and has the ability to underwrite financing commitments up to $125 million.

At its launch last spring, NXT Capital had the capacity to finance $1 billion in transactions, and it received follow-on funding in September from Ontario Teachers’ Pension Plan, which made a $150 million equity commitment, Stone Point Capital, which committed $50 million, and an unnamed corporate pension fund that committed $25 million.

NXT Capital has no plans to return to the market for additional capital, Radway said. “Right now our capital needs on the equity side are more than met.”