Lynn Tilton Wants To Save The Middle Market (But Can’t Do It Alone)

Lynn Tilton is on a mission. Each day the founder of distressed buyout firm Patriarch Partners hears from more than 20 worthy middle market companies in need of rescue financing.

The high volume is due, in part, to the lack of access to capital for middle market companies. They are too small to qualify for money from government plan TARP, and traditional sources of capital for middle market companies have retreated from the market to lick their wounds.

Tilton has a solution to the middle market capital drought which involves using money allocated for PPIP alongside cash from private investors. She’s proposed the plan, called SME Rescue Loans Program, to the Treasury and White House in a white paper (posted below). I spoke with her about the plan’s terms, incentives, and status.

PPIP hasn’t exactly gotten off the ground. Why will this plan be more attractive to investors than PPIP, particularly since it gives the first loss to private investors?

The reason PPIP hasn’t gotten off the ground is not because it hasn’t been attractive to investors. The problem is that you’re not getting banks to sell their mortgage assets because they’ve been given TALF, and so they’ve been able to take themselves out of the mess they were in. They’re not looking to sell their mortgage assets at a discount.

So the biggest problem that the economy faces now is the death of lending to middle market companies. The only way to address that is by rescue financing. You need immediate lending availability because companies are liquidating on a daily basis. So we’re trying to put together a structure that allows people to use the leverage to try to offset losses, and still guarantee returns to incent the private sector to make loans.

I tucked my plan into PPIP because there’s money ready to use, and because you won’t need congressional approval, or additional money. The money from PPIP is sitting there for the same purpose, which is to address the ability for banks to lend.

The reason we set it up so that the investor takes the first loss layer is because there was a lot of pushback that this was another opportunity for Wall Street  to be cowboys and make a lot of money. I felt like, if we are in charge, we should be the most responsible. The incentive is the ability to use low cost government capital in terms of leverage.

Why wouldn’t the government just expand the criteria for TALF to include middle market companies?

They could expand the criteria but you don’t want what’s happened with TALF, which is secondary loans. Unemployment continues to rise and will become a problem because middle market companies are going away through liquidations. We need rescue and DIP financing to keep these companies alive, and we don’t want that intention to become a secondary vehicle where people can unwind CLOs and turn middle market loans into newly-leveraged securitization vehicles. TALF would have to be used for only new loans. That can take a long time, and it becomes more complex.

I assume you are investing directly in distressed companies without government leverage now. What’s the benefit to Patriarch Partners of getting the government and others involved?

Yes, we do this every day anyhow. Frankly, I’ve done this because I worry for our country. I don’t need the government to make rescue loans to but certainly I alone cannot fix this problem. I did this because I was hoping that the Treasury and Congress would realize that this is a solution to a great threat and other people would see it and jump on the bandwagon.

When we launched this white paper, we made the decision that we will provide rescue financing to companies. They can request financing from us on the website SMERescueLoans.com. It’s only a week old and we have 50 loan applications already.

How large could this program be if it comes into fruition?

I’d like to see $30 billion of PPIP allocated this way, which would leave to another $5 billion or more of money from investors. That could address a lot of the problems here.

When did you start shopping this plan to the Treasury and the Administration, what has their reaction been, and what is next step?

We started earlier this month. We got almost no pushback on the paper, the problem, or the solution. People at the Treasury and along both party lines were interested. We need to continue to work on it but people have really said they were very interested. The biggest pushback was from people who didn’t vote for TARP and don’t know how to vote for this.

Besides drafting the plan, what would Patriarch Partners’ role be in the program?  Will the firm commit to the invest through the plan? Will it manage any part of it?

We will see where it goes depending on what we’re asked to do. We’re willing to put up $150 million of own money to do a pilot program. But it really is not for us, it’s for the country. We could go out and raise a fund to do it, and I’ve been doing this kind of investing for nine years. I alone cannot move this economy in the right direction, so we’re trying to take what we’ve done here with our data, history and models, and try to push it into a program where money managers will participate.

We’re also trying to get smaller managers involved here. Some of the other programs require $10 billion of assets under management in certain categories. We think in this kind of program, if people have $1 billion of assets dedicated to distressed investing, they will have the infrastructure in place to qualify.

Here’s a recent video of Tilton’s appearance to discuss her plan on Fox Business News:

And here’s the white paper:

SME Rescue Loans Program (a) (2)

Previously:

The Government Has Excluded the Middle Market

Sankaty Raising Funds for DIP and Mid-Market Lending

Who’s Filling The Senior Loan Void? It’s Your Friendly Regional Bank
THL Raising $300 Million For Blind Pool Credit IPO
ACAS Alums Form New Mezz Fund: Boathouse Capital
CastleGuard Partners Wants To Revive Middle Market Lending
Freeport Financial Empties Ship
Heads Keep Rolling at Mid-Market Lenders
Filling the Senior Loan Void: Chatham Capital Steps Up