Bain Capital joins MM CLO frenzy with $450.3M transaction

Bain Capital is the latest private-equity firm to enter the middle-market CLO space.

This week, the $95 billion-asset firm from Boston launched a $450.3 million collateralized loan obligation that will be controlled by an externally managed business development company, Bain Capital Specialty Finance. BCSF is an affiliate of the global asset management firm's Bain Capital Credit unit.

BCC Middle Market CLO 2018-1 will issue $365.7 million in notes, which are to be backed “in part” by loans to small and medium-enterprise firms, according to S&P Global Ratings.

The capital stack includes two floating-rate triple-A tranches: an A-1A class of $215.9 million in notes priced at 155 basis points over three-month Libor, and a Class A-1B notes offering of $35 million, according to an S&P presale report. The Class A-1B notes have a slightly narrower coupon spread of 150 basis points plus Libor, but that rate steps up to 180 basis points after two years.

The unrated subordinated tranche of $84.6 million, representing the equity in the deal, makes up nearly 19% of the deal’s notional value.

The deal is less-leveraged (4.32x) than the average broadly syndicated, open-market CLOs (a three-month average of 9.16%, according to S&P), and has a weighted average spread between cost of funds and note payments of 4.55% – more than 100 basis points above the average 3.43% in recent BSL CLOs.

The portfolio includes loans from 61 firms across a variety of industries, with the largest industry exposures to internet software and services, trading companies, hospitality, healthcare and IT services.

The deal was placed by Citigroup.

The BCC CLO is being marketed less than nine months after BCFS teamed with Antares Capital to introduce a unitranche finance joint venture for private-equity backed middle-market companies. (The JV provides financing up to $350 million to PE-sponsored firms through a unitranche offering that combines senior and subordinate debt into a single, blended-coupon loan).

More than $200 million of BCFS’ investments are through the JV, according to the BDC’s latest quarterly earnings filing with the Securities and Exchange Commission. BCFS is an affiliate of Bain Capital Credit, and is led by BCC executives including Michael Ewald, the managing director and head of BCC's private credit as well as portfolio manager for BCC's middle-market and senior direct lending fund strategies.

In August, GSO/Blackstone debuted its first middle-market CLO with the $502 million Diamond CLO 2018-1 transaction that priced at 127 basis points over Libor. Blackstone’s new CLO included pooled originations from its relaunched direct-lending business.