Middle-market lender Fifth Street Finance Corp. (Nasdaq: FSC), which has been actively working to increase its loan offerings, has made a $110 million acquisition of Healthcare Finance Group LLC (HFG) that will allow it to provide asset-based loans (ABLs) through the target.

New York-based HFG is a specialty lender that provides ABLs – loans secured by a company’s inventory or accounts receivable, or other assets - and term loans, to the health care industry. The company has financed more than $21 billion in receivables and has an outstanding loan portfolio of 57 loans valued at $270 million.

HFG was formed in May 2000 after a management-led buyout of Daiwa Securities America’s health care finance business. The company focuses on lending to middle-market health care companies.

The target primarily makes those secured ABLs, says Juan Alva, partner at Fifth Street, and Fifth Street’s ownership should allow HFG to expand its term loan business line.  

“The benefit for HFG is that they have access to capital so that they can grow their business,” says Alva.

For Fifth Street, the deal provides a portfolio company that can do ABLs, which the company was not previously able to do, Alva says. Now, if someone brings in a deal that requires an ABL component, Fifth Street has a portfolio company that can provide it, Alva says.

In March, HFG provided a $15 million senior secured revolving line of credit to Premier Research, a contract research organization that provides clinical development services to biotechnology, pharmaceutical and medical device companies.

Fifth Street generally provides revolving loans, first and second lien debt, mezzanine debt and equity co-investments in partnership with middle market private equity firms.

In December, Fifth Street provided senior and mezzanine debt for the recapitalization of Garretson Resolution Group, a portfolio company of private equity firm Harvest Partners LP. Garreston provides medical lien resolution services to law firms, corporations, insurance companies, plaintiffs and defendants and other parties. Fifth Street participated in the financing with GE Capital and Carlyle Mezzanine Partners.

The deal, which took about six months to put together, is expected to close by June 30.

Keefe, Bruyette & Woods Inc. and UBS Investment Bank are acted as Healthcare Finance’s financial adviser, while Kaye Scholer LLP is provided legal counsel. Fifth’s Street’s financial adviser was Greenhill & Co., and Proskauer Rose LLP was legal adviser.

Expect to see more deals among health care lenders, sources tell Mergers & Acquisitions.

Fifth Street has always been a large health care industry investor, Alva says.

 “Health care has been a space that’s been very attractive to sponsors,” Alva says.

The company, in April 2011, brought in Greg Browne, who focuses on originating health care loans.

Fifth Street has been actively working to expand its loan offerings. In November, the company expanded its credit facility so it could continue lending as its loan volume increases. Now, the company has a $380 million loan with a $600 million accordion feature.

In the first quarter of 2013, Fifth Street provided two facilities of more than $100 million, underscoring the recapitalization and refinancing trends, each to support private equity sponsors. One refinanced an existing credit facility and the other completed a dividend recapitalization. 

Fifth Street’s acquisition comes during a booming time in the health care sector. Recent transactions have included Takeda Pharmaceutical’s purchase of Inviragen, ECM’s MediFox buy and Auxilium Pharmaceuticals’ acquisition of Actient for $585 million.

For more information on the health care space, see “Healthy Investments.” 

Updated: One day after Fifth Street's acquisition was announced, National Bank Holdings Corp. formed an asset-based loan unit, called NBH Capital Finance

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