Genstar-backed companies drive M&A activity in positions held by AINV, PFLT, SUNS, Audax, TCPC and GSBD
The new-issue loan market turned a corner last week with a procession of closely watched, larger transactions wrapping—due in part to a resurgent high-yield market—leaving investors with little else to chew on. The sudden prospect of a slowing calendar flipped a switch, and accounts flooded into transactions they had previously been viewing with a cautious eye. The frenzy generated seven reverse flexes, including some that were being discussed wide of official guidance just a few days earlier. Indeed no loan deals widened as the market heated up.
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Here is our preview of the most important developments likely to occur in the BDC sector in the coming week. After a January that was notable mostly for what was happening to BDC prices rather than anything else, the week ahead promises to be jam packed with “hard news”; the ongoing Medley drama and the continuing question mark about how the rally will fare entering into Week 7. The BDC Reporter does not expect to get much sleep.
Medley Mergers: For the first time in weeks, our arbitrary prioritization of what is likely to matter most in the BDC sector will not be led by “the markets”. Not that watching the tape will not be important as the BDC rally grows ever longer in the tooth. However, that other long simmering subject: the attempted merger of Medley Capital (MCC) and Medley Management (MDLY) into non-traded Sierra Income which is to be followed by the internalization of the management arrangement and a public issuance, has reached a boiling point. The BDC Reporter has written two articles over the week-end alone – and more than half a dozen in total – about the twists and turns in this poorly received merger proposal. First, there was opposition from several major MCC shareholders, most notably FrontFour Capital (FrontFour). Then a major proxy advisory firm chimed in with what now seems – as we’ve heard both from the proponents of the merger and its opponents – contradictory views about the merits of the transaction. Over the week-end, the plot thickened when a would-be new manager (NextPoint) offered itself as investment advisor to the shareholders of MCC and Sierra, but not MDLY. In fact, NexPoint’s principal strategy is to dump MDLY out of any arrangement, which leaves a bigger pie for the shareholders of the other two entities to share. That’s how we left matters when we went to bed Sunday night and after much hypothesizing to our readers about the possible impact on the stock price of MCC and MDLY and on the value of Sierra.
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Getty Images refinancing first-lien debt held by Barings BDC
Download: LFI BDC Portfolio News 2-4-19
While the loan market has hit a plateau after rallying in the opening days of 2019, high-yield continued to pick up steam, generating a bifurcation between loans and bonds in both the primary and secondary markets. As such, issuers have flocked to the bond market—including the secured-bond market—to optimize executions as last week’s big-ticket transactions for Dun & Bradstreet and TransDigm exemplify.
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Markets: As always, the BDC Reporter – and everyone else – will be keeping an eye on the markets after five weeks of rallying. We’re not yet at the December 3, 2018 level of 2,535 on the Wells Fargo Index which we set last week as a useful target, but have inched closer after the 0.9% increase last week. That left us at 2,519 (2,496 the week before) and almost fully recovered from the December bloodbath. As we’ve discussed at greater length in the BDC Common Stocks Market Recap progress going forward is going to be harder to come by and other forms of non-investment grade debt are already leveling out. On the other hand, if January 2019 looks anything like February 2016 – the last time we had a sudden pull-back out of a seemingly clear blue sky – the price trend will remain upward with only very modest bumps along the way. That rally lasted over a year.
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M&A continues to drive activity; LBO to take out P.F. Chang’s credits held by CĪON, FSK
Arrangers continued to peel more M&A loan business off the forward calendar last week, although early 2019 successes, driven by the opening-week rally, appear to be giving way to a slightly more cautious tone. A resurgent high-yield new-issue market is benefiting as a pair of borrowers are carving out secured notes to take pressure off multibillion-dollar loan executions.
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