Solar Senior Capital Ltd. (Nasdaq: SUNS) is seeking to expand into the lower middle market with its purchase of North Mill Capital LLC from Colford Capital Holdings LLC. The deal represents an opportunity for the New York-based business development company (BDC) to “invest in an established business operating in a less competitive niche,” says Solar Senior CEO Michael Gross.
Solar Senior is a BDC that invests primarily in senior secured loans and the subordinated debt of private, upper middle-market companies. The deal for North Mill gives it the infrastructure it needs to cater to small-to-medium sized businesses across a variety of industries, along with an underwriting team with a track record of delivering “strong credit performance.” Financial terms of the transaction were not disclosed, however Solar Senior is investing $51 million into the deal.
The lower middle market is an ecosystem of transactions valued up to approximately $150 million. The small sector has remained active and has been an attractive landscape for favorable deal opportunities. North Mill Capital, according to the buyer, is scalable and provides access to “another differentiated middle-market credit platform” that operates in a less competitive market focused on senior secured, collateral-based lending. The Princeton, New Jersey-based lender serves companies with borrowing needs of up to $30 million. Solar Senior says North Mill is an attractive buy because its risk-adjusted returns have “a low correlation to the broader non-investment grade credit markets.”
Established in 2010, North Mill has underwritten more than $500 million in total credit to approximately 150 borrowers since its inception. As of last September, the lending company’s portfolio was comprised of nearly $121 million in senior secured loans across 85 issuers. Colford Capital says it sold off the lender in order to focus on North Mill Equipment Finance LLC, which provides commercial equipment financing for small businesses nationwide.
Given the widespread availability of debt financing, the lower middle market holds great potential for dealmakers. Though there is still a great deal of competition for lenders, despite some industry professionals suggesting a credit bubble is on the horizon due to overexposure, Solar Senior’s transaction could be a smoke signal for upper market lenders and BDCs to acquire lower middle-market players.