UPDATED -- Buyers are vying for GE Antares, the jewel in the crown of GE Capital Sponsor Finance, the group within GE Capital that makes loans to private equity-backed companies. General Electric (NYSE: GE), which announced earlier in April it would sell GE Capital to focus on its core industrial business, has reportedly distributed non-disclosure agreements to a dozen bidders, including Apollo Management, Ares Management and Mitsubishi UFJ Financial Group Inc., which are contemplating purchasing GE Capital as a whole or in parts. Oaktree Capital Group LLC chair Bruce Karsh told investors the distressed debt investor is evaluating parts of GE Capital. Much of the interest is zeroing in on GE Capital Sponsor Finance, which, in addition to GE Antares, includes TMT, GE Equity and the Bank Loan Group. GE Antares is of particular interest, due to its relationships with hundreds of private equity firms.
David Brackett, who serves as CEO of GE Antares today, was there at the beginning, when he and other executives left Heller Financial back in 1996 to form Antares Capital, with backing from Mass Mutual Life Insurance Co. Then in 2001, GE Capital bought Heller for $5.3 billion in cash. And in 2005, GE Capital bought Antares, doubling its middle-market lending business with the move. Today, GE Capital is the largest lender in the middle market. It has won Mergers & Acquisitions M&A Mid-Market Lender of the Year award twice first for 2010 and most recently for 2014. Mergers & Acquisitions caught up with Brackett to ask his assessment of the current climate for middle-market loans and to tell us why GE Antares is so attractive to bidders. Mergers & Acquisitions caught up with Brackett to ask his assessment of the current climate for middle-market loans. Brackett declined to comment on the impending sale of GE Capital.
Why is GE Antares so highly regarded?
We are flattered. We have built a brand and a business over 20 years based upon providing private equity sponsors with predictable and reliable financing in good times and in bad. Sponsors want to work with someone they can trust, and we've been very fortunate to earn their trust. Because of that trust, you are rewarded with the ability to finance their companies. We've seen a lot of lenders come and go. This is a time with a lot of new entrants to the market, and not all of them will make it. There's a premium to be placed on dealing with a partner that you can rely on. Over the last 10 years, we have averaged about 100 closed deals per year. That's 1,000 interactions with our private equity sponsors. You have all these impressions that are developed, where we can either meet their expectations, or delight them, or disappoint them. We are always cognizant of that. If you're a new person, you don't have those 1,000 interactions. We also benefit by having played in the same market. We're very much a known entity. We've done so many transactions that we've got a lot of experience and knowledge around middle-market companies. What makes us different is our consistency over a long period of time of being in the market and working cooperatively with our private equity sponsors as partners. It's not to say that someone can't do that for a period of time everyone is well-intentioned but it's difficult to sustain for a long period of time and through economic cycles. With GE we became stronger. Our platform capabilities became even more robust, and as a result we were also able to expand the breadth of our relations to with private equity sponsors, so now we do business with even more private equity sponsors than when we were just Antares Capital.
What notable deals has Antares worked on recently?
One notable deal is for Tank Holding, which makes storage tanks and containers that are used primarily for agricultural settings. It's a company that we started financing in 1988 when it was doing less than $10 million in Ebitda. It has been through at least four or five different private equity sponsors, and we have continued to finance the business. The Ebitda size has increased roughly 10-fold since then. In March, we closed a $510 million credit facility in support of Leonard Green and their recapitalization. It's just fun to see managers grow a business and succeed, and to do that consistently over 20-plus years.
The Federal Reserve Bank is expected to raise interest rates later this year. How is this affecting middle-market lending?
Interest rates have an impact on borrowers' capacity to repay. Everything we see indicates it's going to be a slow, measured increase in interest rates, and we don't see that having a negative impact on the availability of debt. If you go back and look at 2007, Libor was at 5.25 percent, versus today when it's at about 25 or 35 basis points. You had leverage levels in 2007 that were in excess of where we are today, but that was leading up to the financial crisis. The other thing we look at is the interest coverage ratio. In today's structures, we are in excess of 2.5x, and in the '06-'07 time frame it was less than 1.5x. You don't really want to go below 2x, but now you've got meaningful cushion.
How high would rates need to rise to make a significant impact on mid-market lenders?
Because you are dealing with two components, leverage levels and interest rates, that are variable, it is tough to figure out where that would be. Leverage levels could likely expand from where they are today. If we look at our performance in the crisis, our losses were minimal and our private equity sponsors were really supportive. I think we're in a very favorable interest rate environment. There would have to be a major movement in rates, which isn't happening.
How do interest rates affect deal flow?
A stable environment of all types economic and interest rate is favorable for deal flow. For both buyers and sellers, their ability to predict and project the future is enhanced. In volatile times, the buyer and seller will likely have divergent perspectives. But in stable times, it makes for a greater chance of a shared perspective, which means deals can get done.
What trends are important in dealmaking in 2015?
The one trend we have seen is the importance of certainty at close, and the desire of buyers to curtail the duration of their due diligence and loan syndication timing. Buyers want to close quickly, and that is a differentiator for them in a sale process. We have had great success putting together programs with our strategic investors that allow us to speak to about $150 million in hold size. We have found that is very powerful in the market for buyers looking to close quickly. There's a lot of pressure on buyers to move quickly. Purchase prices are high, and as opposed to having to pay absolute top dollar, some buyers are finding they are able to buy at a slight discount based upon speed and certainty. A long, frothy process involving many different bidders provides an opportunity for the seller to pit one against the other for a long period of time, versus a buyer just locking up the deal and saying,” I'll take this off your hands, you don't have to worry about financing and I can close in 30 days.”
--Mary Kathleen Flynn contributed to this report.