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Apollo's MidCap sponsors $292M ABS pool of life-science industry loans

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An Apollo-sponsored middle-market lender to life sciences and technology firms is marking its third trip since 2016 to the ABS market with a collateralization of venture-capital loans for startups.

MidCap Financial Services is supporting a $292 million notes offering dubbed Elm 2020-3 Trust that will be backed by 31 first-lien loans (with an average balance of $9.7 million) to private equity-sponsored firms that have been funded by MidCap loans to finance growth and manage working capital.

The transaction includes $252 million in Class A notes (both fixed- and floating-rate tranches) with a preliminary A rating from Kroll Bond Rating Agency. Kroll also rates a subordinate Class B bond tranche with a BBB- rating.

The Class A notes benefit from credit enhancement via a 68% collateral advance rate to investors, according to Kroll.

The deal is the first ABS transaction in two years for Bethesda, Md.-based MidCap, which is owned by an insurance affiliate of Apollo Global Management (NYSE: APO).

Over 73% of the loans were underwritten to life sciences/healthcare firms involved in biopharmaceuticals and diagnostics, medical devices and healthcare information technology/digital health subsectors.

The remaining loans were made to technology firms, a more recent target client sector for MidCap, which specialize in software, infrastructure software and analytics, healthcare IT, security infrastructure, electronics, multimedia content, hardware, ecommerce and enterprise applications.

The loans are offered with limited interest-only periods, and many are taken out by firms that have to yet to show profits – a reason that MidCap underwrites loans mostly to firms with strong private-equity ties or substantial intellectual property assets.

The 23%+ share of technology loans is the largest concentration for a MidCap deal since the firm began sponsoring asset-backed securities in 2016.

The pool will have no second-lien loans, but MidCap is permitted to build a concentration of up to 15% during the two-year reinvestment period for the deal.

As of June 30, MidCap had over $8.5 billion of funded assets and $27.7 billion of commitments under management. Historically, the company has funded $2.3 billion across 149 life sciences loans and eight technology loans with few defaults (net losses since inception are 0.7% of its total funded amount of the loans).

Kroll applied COVID_19 risk on the potential for some of the companies to have a single-sponsor venture capital or private equity firm, which increases the risk that economic stress on the sponsor from the COVID-19 global pandemic could limit capital reserves to fund loan payments. Kroll assumed no recovery credit in its cash flow analysis.

The company has a much higher funded reserve account (over $8 million) compared to its prior deal that priced in October 2018.

KeyBanc Capital Markets Inc. is the sole structuring advisor and sole bookrunner.

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Esoteric ABS CLOs Healthcare industry Apollo Global Management Middle market