Hedge fund Silver Point Capital is stepping up to provide an $80 million second lien piece for bed and auto cushioning production company Foamex International, the latest twist on alternative financing options for needy borrowers. The loan was sought after the company's assets could not cover all of its debt in an asset-based credit, a banker explained. "It's a story credit," he noted. Silver Point is also leading a second lien piece for Fleet Securities' $65 million deal for Jacuzzi Brands that is set to close next week. The two second lien loans are Silver Point's first two stand alone deals, according to market players, and other hedge funds are looking to get in on the act.
"When the returns are higher [there] should be a lot of [players rushing] to fill the void," said Timothy Shoyer, managing director in the capital markets group at Fleet. Shoyer said Fleet is getting calls left and right with more funds interested in providing second lien debt in conjunction with the lender's deals. With the second lien piece previously less readily used in the loan market, non-regulated investors like Silver Point are providing the loans to satisfy a higher demand for the product. "Since [the second lien] is an emerging product, many lenders are not offering it yet," Shoyer stated. "[But] these non-regulated institutions are able to come in and really assess the risk for each transaction and price it accordingly," he said. "Anytime there is a void created anywhere there is going to be an investor to step up," he said.
Second liens have also been popping up in non-asset based lending (ABL) deals, Shoyer confirmed, but said it is still more complementary to ABL transactions. Other recently completed second lien pieces include the loans for Accuride Corp., Colfax Corp., Woodcraft Industries and Le Nature's (LMW 6/9, 5/19 and 4/21). The loan rates for these deals were as high as 12%, illustrating the heftier coupon the second lien lenders are demanding for the increased risk of the second priority loans. "These investors are non-regulated and not driven by internal credit risk ratings. They're accustomed to workout scenarios, are looking for risk/return-oriented structures and can view each potential deal on its individual merits," Shoyer added, pointing to the firms' advantage over banks to lend on a second lien basis. Banks must be more conservative because they have to minimize risk in the books, he said.
Silver Point was established about a year-and-a-half ago and is a partner in Back Bay Capital, a three-year old business that provides junior, secured trench "B" financing. Fleet Retail Finance, Angelo Gordon and Goldman Sachs are also partners in Back Bay, bankers said. Silver Point was formed by some ex-Goldman partners, they noted. Officials from Silver Point did not return repeated calls.
Bank of America is currently shopping $240 million in asset-based pro rata tranches for Foamex to refinance the rest of the company's debt besides the amount for the second lien loan. A banker said the company found and selected Silver Point to do the stretch debt apart from B of A. Foamex's second lien loan is priced higher than the $190 million revolver and $50 million term loan pieces, however exact pricing could not be determined. The pro rata tranches are being shopped at LIBOR plus 3% and LIBOR plus 31/4% respectively. Last week, GE Capital was close to joining the four-year, asset-based credit as a co-lead, but the banker said this was not yet definite. B of A and GE officials declined to comment. Calls to K. Douglas Ralph, executive v.p. and cfo of Foamex, were referred to a spokeswoman, who declined to comment.