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THL Raising $300 Million For Blind Pool Credit IPO

Buyout shop Thomas H. Lee Partners has filed to take its credit unit public as a business development corporation (BDC). THL Credit Inc. seeks to raise $300 million in a blind pool IPO with no legacy investments, according to a June 1 filing with the Securities and Exchange Commission. Merrill Lynch, Citigroup Global Markets and Deutsche Bank Securities are serving as underwriters.

Known for mega-buyout deals like Clear Channel and Dunkin’ Brands, Thomas H. Lee (THL) Partners began a credit investing unit in June 2007, raising $500 million from private investors to invest in structured debt finance. THL Credit Advisors is led by James Hunt, who previously was a managing director and co-founder of Bison Capital. Other execs include AIG vet Sam Tillinghast (president and COO of THL Credit), Gregg Hammer and Christopher Ochs, who co-headed Leveraged Capital at AIG, and Hunter Stropp from GE Asset Management.

In its filing, THL says that commercial bank consolidation has reduced the number serving middle-market companies, which are increasingly seeking lenders. The firm intends to invest in private subordinated debt investments of middle-market companies.

“Because the general economic climate and financial markets have deteriorated since the summer of 2007, we believe opportunities to invest in solid, underserved middle-market companies remain plentiful,” the filing states.

One way the BDC will distinguish itself is with investor-friendly terms. THL Credit Inc. will take a 1.5% management fee and 15% carried interest on its funds, which is lower than the typical 2% and 20% fee structure for private equity vehicles.

The new fund, as well as THL Credit’s first fund, has the capacity to invest in the debt of THL Partners’ portfolio companies, a source familiar with the situation said. THL Credit, which is not fully deployed, has made some secondary debt purchases in THL Partners portfolio companies. However, the BDC will be focused on smaller companies. THL defines “middle market” as companies with between $50 million and $500 million revenues, or Ebitda of $10 million.

If the IPO floats, THL Credit would be entering the market during a time of consolidation for BDCs. Plummeting stock prices and mark-to-market accounting rules have diminished the firms’ collateral against lines of credit, which in turn, has diminished their ability to lend. Smaller shops like Patriot Capital and GSC Investment have announced plans to explore strategic alternatives. Meanwhile, American Capital faces a potential bankruptcy if it cannot negotiate a deal with lenders over a recent default on its debt. CEO Malon Wilkus said in the firm’s latest earnings report that he is “confident” a deal will be reached.

Michael Arougheti, CEO of Ares Capital, recently said there are benefits to consolidation among BDCs. In a March roundtable discussion hosted by investment bank Stifel Nicolaus, he said, “Over time, consolidation is necessary to bring more efficiencies and get the sector moving in the right direction again,” he said.

THL sits on plenty of cash from its buyout funds. According to an April report from Dow Jones, the firm had deployed around half of its sixth fund, an $8.1 billion pool raised in 2007.

View the entire filing here:

THL Credit N-2