Merrill Lynch, looking to jump into the middle-market financing game and expand a new group to fill a void it sees in the market, is gearing up to battle the remaining hardcore players still operating there. Merrill last month hired former Heller Financial veteran Robert Radway as managing director and president of Merrill Lynch Capital, a newly formed commercial finance business. Finova Group made a sharp exit last year andGE Capital swallowed Heller, and now Radway sees the pump primed for a big player looking to serve the market. "Finova, Comdisco and Heller, among others, departed the space, and no one has replaced them," Radway said. "The market consolidated dramatically, and is now underserved."
But some competitors beg to differ and note that strolling into the market may not be so easy for Merrill. "I don't know why Merrill is saying it is underserved," said Jim Connolly, ceo and president of Fleet Capital. "There has been pullback from speculative acquisition-based financing, but there is a lot of competition still there. Merrill will have to outcompete to grow."
And other players are stepping up in the market. RBC Dominion Securities at the end of last year formed RBC Leveraged Finance, and Indosuez Capital, despite the exodus of key staff to form the RBC unit, reaffirmed its commitment to middle-market finance.
In addition to those players, there are small shops that open all the time, Connolly said, and most of them have a hard time against the existing lenders. Connolly said he believes Merrill is a serious player, though. "It makes a difference because of who they are. Middle-market lending is very relationship driven. It is about setting up an entire infrastructure and convincing the other lenders." Ken Worthington, an equity analyst at CIBC World Markets, pointed out that Merrill has worked in the area in the past, but it has been growing fast. Additionally, a number of Merrill's high-net-worth clients own these companies, and it is a natural extension of the relationship. "This is not an area for tremendous growth for Merrill Lynch's earnings, but on the margins there are growing opportunities."
Merrill will concentrate on deals up to $50 million across all sectors, said Radway, including corporate finance, equipment finance and real estate. Asset- and cash- flow based revolvers will be offered, he added. Currently, there is a handful of people in the group. But Radway predicts strong growth behind Merrill's balance sheet and name, and a staff 200 -- including portfolio managers, underwriters, syndicators and analysts--is targeted over the next 18 months. "Through Merrill Lynch Capital, we are significantly expanding our efforts to meet the financing needs of middle-market businesses," said John Qua, senior v.p. and head of the Merrill Lynch U.S. Banking Group, to whom Radway reports.