Lone Star Funds pulled out of its joint venture with Antares Capital that provides unitranche loans for middle-market companies.
Lone Star Funds has “decided to cease making new unitranche loan commitments through the Middle Market Growth Program,” wrote Carol Ann Wharton, an Antares spokeswoman, in a May 22 emailed response to questions.
Antares and Lone Star are working “to evaluate a go-forward approach,” but both will continue to support the existing program, including outstanding commitments and current portfolio companies, Wharton said. Antares will also continue to originate unitranche transactions outside MMGP through a combination of its balance sheet, asset-management partners and institutional loan investors, the email said.
Christina Pretto, a Lone Star spokeswoman, confirmed that the firm wouldn’t be making unitranche loans through MMGP. She declined further comment.
Lone Star wasn’t happy with the way the JV was working, according to a source with knowledge of the situation.
Antares and L Star Capital, Lone Star’s credit affiliate, announced the latest version of MMGP in 2016. Antares had prior unitranche joint ventures with Ares Capital and Lone Star that ended when Canada Pension Plan Investment Board acquired the Chicago lender in 2015 for $12 billion.
Unitranche loans combine senior and subordinated debt in one instrument, Reuters reported. The loan type often reduces borrowing costs because it eliminates the need for complex inter-creditor agreements between senior and junior lenders. With unitranche debt, lenders frequently hold more of the debt on their own balance sheets, instead of trading it in the syndicated-loan market, Buyouts has reported.
The structure has gained favor among PE firms for its ease of execution, especially in volatile market conditions, Reuters said.
MMGP can provide up to $350 million in financing. There are currently 16 borrowers in the MMGP, media reports say.
Recent MMGP deals include providing unitranche financing for Littlejohn’s buy of Tidel in March, Calera Capital’s acquisition of Evans Network of Cos in February and, in December, FFL Partners’ buy of Crisis Prevention Institute.
In the MMGP venture, Lone Star owned the junior interest while Antares had the senior interest, a second source said. The loans were structured so that if one went bad, Lone Star was responsible for all the losses until its capital was wiped out, the second person said. The junior interest had a higher yield if the portfolio performed satisfactorily, the person said.
Antares, which owned the senior debt, had a lower yield but its stake was much safer, the source said. “Antares doesn’t lose anything,” the source said.
Antares is one of the biggest middle-market lenders. It has more than $20 billion in capital under management and administration.
Lone Star Funds invests in real estate, equity, credit and other assets. The PE firm has more than $70 billion in aggregate capital commitments. In 2016, Lone Star Funds cleared $11 billion in fresh capital, surpassing the $7.2 billion it raised in 2015, Buyouts has reported. The PE firm’s Lone Star Fund X flagship collected $5.6 billion in commitments. In 2014, Lone Star closed its ninth flagship fund with $7.2 billion.
Lone Star in 2016 also wrapped up Lone Star Real Estate Fund V with $5.8 billion in commitments.
Antares Capital Advisers LLC, a unit of Antares Capital, closed a $2.1 billion collateralized loan obligation in April. The $2.1 billion CLO is the largest issued in the U.S. since the financial crisis and the third largest in history. Antares is expected to use the CLO to diversify its funding sources and expand its loan business, the Financial Times reported.
The popularity of unitranche facilities grew in the past few years as more non-bank lenders entered the middle market. Large banks fueled the trend by pulling back from middle-market lending, focusing on larger deals and decreasing their staffing. Buy-and-hold solutions from lenders have been gaining favor as syndicated loans give up ground in the middle market.
“You’re dealing with a group that is signing up one credit agreement and one set of security documents without a complex inter-creditor agreement that can involve protracted negotiations,” Joanne De Silva, a Ropes & Gray partner who focuses on the space, said in an interview with Buyouts last year. Often the unitranche package may offer pricing advantages compared with other structures, she said.
“The unitranche deals I’ve worked on have grown in size,” she said. “It used to be limited to a smaller number of lenders who were initially involved in the structure and a club of their partners. Now, many other lenders are willing to consider it as an option.”
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