John Sinnenberg Quoted in Corporate Financing Week
Corporate Financing Week
By Matthew Craft
With the junk bond market hitting a rough patch, private equity shops are turning toward mezzanine financing to get their deals done. “We’re seeing some really large mezzanine deals getting done in the last month or so,” said Howard Gellis, senior managing director of Blackstone Mezzanine Partners. “I wouldn’t say happy days are here again.Maybe I would in 60 days.” There is no public data for the private debt financing, but anecdotal evidence points to a recent surge in mezzanine deals.
Gellis said that as high-yield investors get pickier, the shops most likely to benefit from broken public deals are Goldman Sachs’ mezzanine group, TCW/Crescent Mezzanine and Blackstone’s. Executives at Goldman and TCW didn’t return calls.
A buyout player at a well-known shop said the high-yield pipeline is getting backed up with deals that would put too much leverage on portfolio companies. “There’s no way to get this all executed,” he said, adding that he’s seeing more sponsors turn to mezzanine funds. Next week, a series of LBO-related debt issues are scheduled to come to the market.
Mezzanine debt sits above equity but below senior debt in the capital structure. It has a higher coupon than high-yield debt and often carries a warrant. But the terms are often flexible. And for sponsors, there’s no worry about arranging investors to buy the debt as in a high-yield transaction, nor any requirements to comply with Sarbanes-Oxley or the Securities and Exchange Commission. The portfolio company’s information remains private.
John Sinnenberg, managing partner at Key Principal Partners in Cleveland, Ohio, said in the first six months of the year he did one mezzanine deal. In the last four months, he’s done four. “Our dealflow volume right now is doubled or tripled what it was three months ago,” added Mark Holdsworth, a partner at Tennenbaum Capital Partners in Santa Monica, Calif.
Corporate bond issuance from smaller companies has also dried up, contributing to the mezzanine and second-lien markets. A bulge-bracket banker whose group tracks junk-bond deals for companies with less than $40 million in EBITDA said there were 14 deals of this size in the first half of the year, but only two in the third quarter and none since October. It’s no coincidence that second-lien and mezzanine deals have picked up the slack, he said.
Although the explosion of the second-lien market in the past two years has siphoned off mezzanine business, rising rates and credit concerns make second-lien, which is priced off LIBOR, more expensive. And an economic downturn makes fixed-rate mezzanine even more attractive. “We’re looking at the second-lien market,” Sinnenberg said, “because we think there’ll be opportunities after the market turns down.”