CapitalSource Revs Up Lending in Middle Market

CapitalSource Inc., a specialized finance company, is bouncing back to provide a wider variety of leveraged finance.

The Chevy Chase, Md.-based lender is increasing its emphasis on loans to sponsor-backed companies, Ryan Golding, the managing director of CapitalSource Leveraged Finance Group, told sister publication Buyouts magazine. He estimated leveraged finance would represent a third of CapitalSource’s $1 billion loan volume in 2011.

The CapitalSource unit focuses primarily on senior secured cash flow-based loans but does some mezzanine finance, said Golding, who took over the leadership of the group earlier this year, working out of the company’s Chicago office. The firm had retrenched during the financial crisis, focusing on key industries, including health care, technology and communications, along with the security sector and homeland defense.

“I would say we never left the market,” said Golding (pictured). “We probably went under the radar for all of 2009 and the first part of 2010. We focused on sectors we know really, really well.”

To some extent, CapitalSource has been transforming its business. In July 2008 the company bought Fremont Investment & Loan, an industrial loan company that was a subprime mortgage lender until regulators ordered it out of that business in 2007. Along with about $5 billion of retail deposits, the renamed CapitalSource Bank picked up 21 branches in California. In April 2010 CapitalSource acquired MainStreet Lender LLC, a Small Business Administration-licensed lender that also was based in Chevy Chase.

To be sure, CapitalSource also struggled during the financial crisis. In February 2009, the company received a one-time waiver to keep it from breaching a covenant on a loan it received from Wachovia Corp. and Bank of America about two years earlier. While the economy struggled, the company concentrated on consolidating its acquisitions, Golding said. “We focused on cleaning up shop.”

The Leveraged Finance Group did $250 million in originations in 2010, and Golding expects the group to expand that by $100 million more this year and an additional $100 million more in 2012, he said. “We’re focused on continuing to grow that business.”

The group’s “sweet spot” is a borrower with $8 million to $40 million of EBITDA. CapitalSource could lend up to $40 million in senior secured, often by working with other lenders to form syndicates to do a facility, he said. “We’re never going to hold more than $20 [million] or $25 million on our balance sheet.”

The group ideally will grow to do 15 to 25 deals a year, he said. “We are firmly a mid-market lender. We also are a relationship-focused lender.”

CapitalSource plans eventually to convert the industrial loan company to a commercial bank charter, which ultimately would mean CapitalSource would become a bank holding company.

CapitalSource operates in four main segments, including real estate, small business and a professional practice, but Golding is emphasizing commercial lending, which includes leveraged finance. “I’m not surprised we don’t show up on people’s charts. We definitely will this year.”

Steve Bills is a senior editor at Buyouts Magazine. Any opinions expressed here are entirely his own. Follow him on Twitter @Steve_Bills. Follow Buyouts tweets @Buyouts. For information on how to subscribe, contact Greg Winterton at greg.winterton@thomsonreuters.com.