Cohen Bros. & Company has snared a team from PB Capital to build a middle-market collateralized loan obligation business as the once-neglected sector continues to attract new capital. "It's a fairly hot asset class in terms of returns from an equity perspective," said Kevin Braddish, head of the new Cohen Bros. group and a managing director.
From 2000-03 Fitch Ratings assigned $2.65 billion of liabilities funding middle-market CLOs, while in 2004, $2.8 billion of liabilities were rated. This year has shown no signs of slowing down with FriedbergMilstein and Wachovia Securities among the firms raising funds. Additionally, Business Development Corporations for Ares Capital Management and Apollo Management are catching on as firms look to fill a gap created by banking consolidation in the 1990s.
Braddish, who was previously managing director of commercial finance at PB running the asset-based lending, logistics finance and leverage finance businesses, explained the middle market has been less affected by the sort of technicals that have existed in the more broadly syndicated loan market. Spreads and leverage have been impacted, but not to the same extent, he said. Middle-market deals, which often require greater due diligence on the part of the lender and familiarity with the space, are generally defined as credit facilities between $50 million to $150 million. Historically, they have been unrated, though that is changing.
Explaining the strategy, Braddish noted that Cohen Bros. has an investment banking practice with a focus on regional banks and insurance companies and is also a significant asset manager. The firm has in excess of $5.5 billion in assets under management, with the products ranging from trust preferred securities issued by banks, insurance companies and REITS as well as Asset Backed Securities. Most of these are typically deployed using a CDO structure. "It made a lot of sense to expand the asset management business into different asset classes and as it related to the middle-market loan space they needed to find a team that has been in that space," he said.
Other members of the PB team that have migrated are Steven Alexander, director, Michael Bedore, director and Jonathan Tepper, v.p. "The team has experience managing portfolios, but also on the origination and underwriting side. We have people who have been on the other side of the equation, written bank books and have an appreciation for the other side," he said. While at PB the bank co-agented a $203 million lending package in support of DB Capital Partners' acquisition of Murine and Clear Eyes and co-agented a $118 million lending package, and committed $20 million in support of Investcorp's acquisition of Aero Products.
"Long-term, we would want to evolve into an origination capability. This enhances the economics and insulates you from supply and demand fluctuations. But to start we will be strictly on the buyside, with the bread and butter being in the middle-market," said Braddish. He noted that the firm will buy some of the larger single-B names and credit facilities that are between $200 million to $1 billion.
Commenting on the decision to leave PB, Braddish said the primary motivator was to pursue more of an entrepreneurial environment. He declined to discuss whether PB would replace the team, referring calls to the German bank. Thomas Leissl, who runs PB Capital in the U.S., said the bank would not be replacing the departing staffers. He explained that this business was a major line for the bank in the 1990s when the firm was BHF Capital, but since being acquired it 2001, the focus has changed. "Today we are investing our money differently," he said. Last year the firm hired a team from J.P. Morgan for credit investing, while PB no longer has appetite for single-B risk, said Leissl, citing rising leverage as a key concern.
