Loan investors flush with cash are increasingly turning to middle-market loans, an area where few previously invested and which is characterized more by club deals. But there is more capital available than there are investment opportunities, and investors and agents who did not historically participate in middle market deals have started to get involved in that space. "We're starting to see banks/dealers get involved in the upper-end of the middle market and attempt to broadly syndicate those transactions," noted Daniel Smith, managing partner and head of debt investments with RBC Capital Partners. RBC considers the upper end of the middle market, or large middle market to be transactions with facility sizes of $150-250 million.
In the past, middle-market loans were dominated by banks and specialty investors such as Antares Capital Corp. and Denali Capital. These shops consistently highlighted the fact that middle-market loans are priced wider than broadly syndicated loans, with less volatility in the spread. But it is also a small market compared to the larger syndicated loans, which is why the expertise of management was considered crucial.
But this appears to be changing. Syndication is said to be eight times oversubscribed on the $130 million facility backing The Cypress Group's acquisition of Communication & Power Industries from Leonard Green & Partners. UBS and Bear Sterns lead the facility. "In the last year, we have seen a spike in interest in middle-market loans," said Brendan Dillon, managing director and head of loan sales with UBS. "These loans are not only underwritten well, but there's a lot of liquidity, which shows a constant affirmation of the value of the loans for the customers. We have not seen credit deterioration in these loans in the past three years so investors have become more comfortable in this end of the market," Dillon added.
One lender noted the activity is borne out of necessity. "Institutional guys are much more willing to come into smaller deals with less liquidity. They are just desperate to put out money," said one banker. But Dillon disagreed. "Ninety percent of the customers buying middle-market loans today will buy them next week and next year, other than certain hedge funds," he stated. "I can't imagine any situation where an inflow of big-cap deals would reduce interest in smaller-cap deals anytime soon." The trend, however, is not seeping down to the smallest deals. "We're not seeing a whole lot of new people in the middle-middle market and small middle-market," said Smith.