too early, before we had strength-
ened our senior debt. Interestingly,
we learned that we needed to find
the right type of equity investor. We
needed an investor that understood
middle-market companies and,
therefore, also understood our
clients and our loan portfolio. We
were able to offer equity inves-
tors an interesting opportunity:
Invest growth equity in a company
at an attractive valuation with
understandable credit risk and the
potential for profitable growth.
◗ Replace subordinate debt. We paid
down some subordinate debt with the
proceeds of the equity raise. But we
still had a large amount of subordinate
debt outstanding that needed to be
refinanced and extended. The day we
closed our equity raise in May 2010, we
began work on raising unsecured debt.
In December 2010, we closed a $100
million high-yield bond issuance with
a five-year maturity to refinance our
short-term subordinate debt. This trans-
action reduced our funding risk further
and provided additional growth capital.
are priceless. During the credit crisis,
our existing banks and prospective lenders had many competing
demands. It took strong personal relationships to retain their attention.
Bankers are people, and they would
rather work with clients they respect
often want to lend against the entire business, not just a portfolio of
loans. First Capital lends selectively
to smaller factoring companies.
Lessons to Live By
Maintain your credit quality. Credit
quality is a prerequisite to a successful funding program. If our loan
portfolio had not performed, it would
have been difficult (and maybe impossible) to find attractive funding.
Focus on the possible. Pick the ripe
fruit! Over the last few years, different types of capital were available at
different times. In 2007 and 2008, we
saw demand for subordinate debt by
offshore funds of funds, so we formed
an offshore mutual fund. In 2008 and
2009, a few regional banks were still
lending, so we closed two new senior
debt facilities with regional banks.
Also in 2009, banks were willing to
buy loan participations when other
forms of senior debt were scarce, so
we increased our sales of whole loan
participations. In 2010, private equity
funds were sitting on large commitments of capital and looking for
investments, so we pursued an equity
raise that closed in May 2010. Had we
tried to complete these transactions
when the investors were not ready to
do business, we would not have been
successful. The moral of the story is:
Don’t try to chase capital that’s out of
favor. It’s like trying to pick strawberries during the corn harvest.
Securitization. Term securitizations
are again possible for larger finance
companies with good historical performance, although pricing remains
high. Investors saw that factoring
lines and senior-secured working
capital loans performed well during
the credit crisis.
Equity. Larger banks are not yet
aggressively buying finance companies. Private equity is interested but
generally requires control. Larger finance companies are starting to buy
smaller ones. First Capital has looked
at acquiring commercial finance
companies or loan portfolios.
In conclusion, First Capital weathered the funding storm of the credit
crisis and emerged stronger and more
focused. We still have challenges, but
they seem more manageable. This is
the first year in a while that funding
will not constrain our growth. In fact,
the real challenge is to find new clients to grow our loan portfolio. TSL
Cultivate smart investors. Our best
lenders and investors understand our
assets. When there are bumps in the
road, it’s easier to deal with sophisticated lenders. During our capital
raise, we had the most success with
private equity firms that focused on
middle-market companies. They were
natural investors for us because they
could look at every loan in the portfolio and understand it. If we were a
real estate lender, we would have had
to find a very different investor that
understood real estate loans.
Where Is the Money Today?
Today, there are fewer funding sources
than before the credit crisis. But pockets of capital have reemerged.
Glen Stein joined First Capital in 2007 to
focus on its funding strategies. He serves
as executive vice president and chief capital
markets officer. He can be reached at 561-
623-1871 or email@example.com.
Subordinate debt. Now is the season
for subordinate debt. If you can offer
a yield of 12% to 16%, there are funding sources for transactions over $10
million. Larger transactions typically
Nurture relationships. Banks are run
by people, and strong relationships
Senior debt: Some banks are back
in the market. Most have clarity on
their business plans and target clients. Larger banks are interested in
transactions over $50 million. Some
small banks are willing to lend, but