Leveraged Finance
Through our Leveraged Finance group, the Company provides senior, secured cash
flow loans and, to a lesser extent, first out, second lien and unitranche loans,
to middle market companies. These companies are typically backed by established
private equity groups that manage large investment funds and have proven investment
track records. The proceeds of these loans are used primarily for acquisitions,
recapitalizations and refinancing or other general corporate purposes. The Leveraged
Finance group also provides senior secured loans to larger middle market companies
with greater financing needs by participating in larger credit facilities with
other lenders as a member of a syndicate.
We believe that private equity backed companies represent an attractive segment
of the overall market for financing middle market companies. Commonly known
as sponsored lending, this financing segment is large, often representing 30-40%
of total middle market lending measured by new loan volume. Transaction activity
in this financing segment is driven by an estimated 600 private equity firms
in the US that specialize in investing in middle market companies. By focusing
our origination activity on this universe of firms, the Company seeks to leverage
its direct origination effort into significant transaction flow, as each firm
typically completes several transactions per year.
We believe that NewStar is among the most active lenders focused on financing
private equity backed companies in the middle market. We have established a
recognized brand in the market with a reputation as a smart, reliable lender
that is responsive, consistent and constructive. Since inception, the Company
has funded loans totaling more than $8.8 billion to approximately 618 companies
backed by nearly 239 different financial sponsors. The Company’s national
lending strategy is supported by a network of offices located across the country.
We develop new customer relationships and source our loans primarily through
the direct marketing and origination efforts of our bankers. The Company’s
bankers call directly on prospective clients and referrals sources from this
network of offices. They have established relationships with a wide range of
prospective customers and referral sources, including approximately 239 private
equity groups with investment strategies focused on the middle market, mid-sized
companies, corporate executives, banks, other non-bank “club” lenders,
and investment banks. To a lesser extent, we may also source loans and other
debt products by participating in larger credit facilities syndicated by other
lenders.
We generally compete for lending opportunities on the basis of our reputation
and transaction experience. Through our strategic relationship, we also originate
financing opportunities from referrals of transactions in which we co-lend with
Franklin Square or other affiliates of GSO. We believe that our strategic relationship
will continue to help us compete more effectively for lending opportunities
by enabling us to provide larger credit commitments and “one-stop”
financing solutions to customers comprised of unitranche loans or a combination
of senior and junior debt capital in partnership with GSO or Franklin Square.
NewStar offers a range of senior debt financing options, including revolving
credit facilities, term loans and other debt products secured by a variety of
business assets. Loans are typically structured to mature in five to six years
and require monthly or quarterly interest payments at variable rates based on
a spread to LIBOR or the prime rate, many with interest rate floors. Through
our strategic relationship, we also seek to offer a more complete range of debt
financing options, including second lien term loans, unitranche term loans,
subordinated notes and, to a lesser extent, private equity co-investments.
We target mid-sized companies operating in a broad range of industries and market
segments where we believe that we have competitive advantages and significant
lending and underwriting experience, including:
healthcare;
manufacturing and industrial;
financial services;
energy/chemical services;
printing/publishing;
consumer, retail and restaurants; and
The Company has well established lending guidelines and transaction parameters.
We focus on transactions with established companies that have strong market
positions in targeted industry sectors. Our borrowers are typically unrated,
but have credit profiles that we believe are comparable to B1/B2/B3 rated companies
due to their limited size and use of leverage. The Company’s preference
is generally to finance acquisitions and other productive uses of capital subject
to structural parameters, such as maximum leverage, that can vary significantly
depending on the facts and circumstances of each situation. Substantially all
the Company’s loans have significant lender protections, including financial
covenants that are set at levels with cushions to projected financial performance.
They also typically include restrictive covenants and mandatory prepayment provisions
that limit borrowers’ ability to incur additional indebtedness and make
acquisitions. Many transactions also include an excess cash flow recapture provision,
which is designed to accelerate debt repayment and de-leveraging.
NewStar is also selective in targeting transaction sponsors, focusing on more
established firms with between $500 million and several billion dollars of committed
capital managed across multiple funds. The Company invests significant resources
in developing relationships with target sponsors and understanding their respective
investment strategies, performance track records, access to capital, and industry
focus, as well as the backgrounds of their investment professionals. Our management
believes that a significant factor in the Company’s success has been the
quality of its private equity franchise and the breadth of relationships it
has developed with private equity firms. In many cases, the relationships that
members of our management have with investment professionals at these firms
extend from early in their professional careers. We believe the value created
by our private equity relationships is reflected in the transaction flow that
the Company generates and in the repeat business we have experienced with targeted
sponsors.
NewStar’s origination and credit strategies are strongly influenced by
industry dynamics. The Company has invested in the development of an experienced
staff of portfolio managers with deep industry expertise responsible for covering
nine broad industry sectors. These portfolio managers maintain extensive networks
of industry contacts in their respective industries and employ a research-driven
framework to develop insights into these sectors intended to guide origination
strategy and credit selection.
Business Credit
Through its Business Credit lending group, NewStar provides working capital
financing to asset-intensive companies that typically borrow against the value
of their inventory and accounts receivable. These asset-based loans may also
be used to support other business purposes, including acquisitions and recapitalizations,
as well as growth strategies. Typical borrowers generate sales revenue between
$25 million and $500 million and operate across a range of industry sectors.
The Company generally provides revolving credit facilities in amounts linked
to borrowers’ expected working capital needs and may also provide term
loans backed by longer term assets and other excess collateral.
This type of fully-followed, asset-based lending is highly credit and operationally
intensive. As part of the underwriting process and ongoing management of credit
relationships, Business Credit tracks collateral values and performs regular
field audits to confirm financial and borrowing base reporting. Audit results
and appraisals are used to determine collateral eligibility and advance rates.
Collateral values are tracked by specialized collateral analysts and daily borrowing
activity is managed by collateral analysts and experienced account executives.
Nearly all of our asset-based lending relationships require dominion over borrowers’
cash. Cash dominion gives us significant control of a borrowers’ cash
flow, including collections of all accounts receivable through lock-boxes controlled
by the Company. This also facilitates subsequent disbursements of cash to repay
advances under the credit line or for other corporate purposes including paying
vendors, employees and others. We also verify receivables in certain circumstances,
which involves verification specialists contacting account debtors of borrowers
to confirm the existence and amount of receivables pledged as collateral.
Business Credit develops lending opportunities and sources transactions through
an extensive network of long-standing relationships with corporate executives,
private equity firms, intermediaries, turnaround consultants, banks and other
referral sources. With our main Business Credit office in Dallas and marketing
offices in Boston, Chicago, Portland and San Francisco, we have a national asset-based
lending origination platform capable of originating significant loan volume.
The group’s centralized marketing effort combined with regional sales
coverage is designed to generate a significant flow of prospects and capitalize
on the most attractive lending opportunities in the market.
The Business Credit group also benefits from the strategic relationship with
Franklin Square and GSO by offering asset-based revolving credit facilities
as a co-lender with them. We also expect to continue to provide financing for
companies referred to us by GSO or Blackstone that are experiencing some financial
stress or completing turnarounds.
Asset-based loans originated by this group typically range in size from $5 million
to $50 million. We also have the ability to arrange significantly larger transactions
that we may syndicate to others.
Business Credit targets mid-sized companies in a variety of asset-intensive
industries for our asset-based loans including:
business services;
auto/transportation;
marketing;
retail;
general manufacturing;
wholesale distribution; and
technology.
Our asset-based credit products include the following:
revolving lines of credit; and
senior secured term loans.
In determining our borrowers’ ability and willingness to repay loans,
our Business Credit group conducts a detailed due diligence investigation to
assess financial reporting accuracy and capabilities as well as to verify the
values of business assets among other things. We employ third parties to conduct
field exams to audit financial reporting and to appraise the value of certain
types of collateral in order to estimate its liquidation value. Financing arrangements
with our customers also typically include substantial controls over the application
of borrowers’ cash and we typically retain discretion over collateral
advance rates and eligibility among other key terms and conditions.
Real Estate
Our Real Estate group provides first mortgage, transitional financing to professional
real estate investors and developers to acquire and reposition commercial properties
typically valued between $10 million and $50 million. We source our commercial
real estate loans primarily through property investors, specialized commercial
real estate brokers, regional banks and other financial intermediaries, as well
as through our strategic partners.
Approximately $100.7 million of our aggregate loan portfolio is comprised of
loans secured by first mortgages on commercial properties. The collateral to
the commercial real estate loan portfolio consists of a range of property types
located across the US in significant metropolitan statistical areas with a modest
concentration in loans secured by suburban office buildings.
The Company typically finances the acquisition of properties valued between
$10 and $50 million as the sole lender without recourse to the sponsor. Loans
are most often structured with an initial term of three years with two one year
extension options. These loans generally do not provide for scheduled amortization
and the primary source of repayment is refinancing upon stabilization of the
property or sale. We generally hold back a portion of loan proceeds to fund
improvements, tenant build-outs, and interest reserves.
After curtailing new lending activity in this group due to the dislocation in
the real estate market during the financial crisis and ensuing recession, we
have been extremely selective in our real estate lending activity in connection
with our new strategic relationships.
Our focus on property types may vary by geographic region based on both economic
fundamentals and underlying local market conditions that impact the demand for
real estate. Our loans typically range in size from $10 million to $35 million.
Although we generally limit loan sizes to $25 million, our exposure to certain
loans and other debt products exceeds $30 million from time to time.
For our commercial real estate loans, we perform due diligence and credit analyses
that focus on the following key considerations:
the sponsor’s history, capital and liquidity, and portfolio of other properties;
the property’s historical and projected cash flow as a primary source
of repayment;
tenant creditworthiness;
the borrower’s plan for the subject property, including refinancing options
upon stabilization as a secondary source of repayment;
the property’s condition;
local real estate market conditions;
loan-to-value based on independent third-party appraisals;
the borrower’s demonstrated operating capability and creditworthiness;
licensing and environmental issues related to the property and the borrower;
and
the borrower’s management.
Equipment Finance
Our Equipment Finance group provides a range of equipment loan and lease financing
options to mid-sized companies to fund various types of capital expenditures.
We originate equipment loans and leases through a team of experienced marketing
officers who develop new business directly with prospective lessees. We continue
to expand our internal sales and marketing efforts to cross-sell leases to our
existing customers and call directly on other end-users in the market, including
portfolio companies owned by private equity investment firms with whom we have
established relationships through our Leveraged Finance group.
We finance essential-use equipment for mid-sized businesses nationwide. Our
Equipment Finance group offers a variety of leases and loan products with various
end-of-term options to fund a wide range of equipment types, including manufacturing,
technology, healthcare, transportation, and telecom equipment. Targeted transaction
sizes range from $1 million to $20 million.
Asset Management
As a registered investment adviser since 2012, NewStar offers investment products
for qualified institutions to invest in private credit funds managed by the
Company that employ credit oriented strategies, focused on middle market loans
and liquid tradeable credit.
The Company’s asset management activities provide important financial
and strategic benefits. We earn management fees for our role as the investment
manager for funds that we manage. Compensation as investment manager is comprised
of both base management fees and incentive fees. We also enjoy important strategic
benefits from the management of certain types of credit funds because they allow
us to provide more capital to our customers, while limiting our direct balance
sheet risk. As a result, we believe this enhances our competitive position.
We believe that NewStar was among the first independent commercial finance companies
to develop an asset management platform to provide investment strategies targeting
middle market loans. The Company launched its first fund in 2005, which was
called NewStar Credit Opportunities Fund ("NCOF”) to co-invest in
loans originated by the Company. The fund was capitalized with $150 million
of equity from third party investors. This equity commitment was then levered
to support an investment portfolio of $600 million using bank credit facilities
to support the initial ramp-up followed by a securitization, to provide long-term
match funding for the fund’s assets. The Company launched the $300 million
Arlington Fund in 2013. It was increased to $400 million in 2014, and also employed
leverage through a loan securitization. The Company closed its third fund, a
$400 million levered fund known as the Clarendon Fund in 2014, with an anchor
equity investment from funds sponsored by Franklin Square and sub-advised by
GSO. As part of our strategic relationship, we intend to continue to offer GSO
and Franklin Square opportunities to invest additional capital in future lending
vehicles managed by NewStar.
In October 2015, we acquired Boston-based FOC Partners, a boutique credit manager
and also a registered investment adviser. We operate FOC Partners as a wholly
owned subsidiary under the name NewStar Capital. NewStar Capital manages two
private debt funds with direct lending strategies totaling more than $79 million,
six broadly syndicated CLOs with liquid loan strategies totaling about $1.9
billion, and a series of other funds and accounts representing approximately
$111 million.
The Company’s managed funds are allocated a portion of the loans we originate
based on an established allocation policy that defines a set of rules for managing
this activity. We are currently allocating loans to the Clarendon and Arlington
Funds.