New York-based commercial finance and asset management company Churchill Financial completed its acquisition of Churchill Capital's Mezzanine Finance Business last week. Though the merger, which will solidify two business platforms that have long been converging, Churchill Financial hopes to take advantage of increasingly attractive market conditions for mezzanine lending.

While the mezzanine market has remained relatively slow amid a tidal wave of second-lien activity, the investment vehicle could begin to see its own wave cresting, according to President and Chief Executive Ken Kencel, making it a very suitable time for Churchill to enhance its mezzanine lending business. "The mezzanine market has had ebbs and flows in terms of activity. And with the growth in the second-lien market, mezzanine financing has been relatively quiet over the last few years," Kencel said. However, with interest rates edging up a bit, the mezzanine market has increased in activity. "We felt that the timing was good to get more involved directly in the mezzanine business. The market has increased in popularity, and is more active, so we felt that it was important to have a more substantial mezzanine capability and experienced people who have done it for a long time."

Joined at birth

Churchill Financial was born in February 2006, the brainchild of Churchill Capital's senior principles Mike Hahn and Hap Fauth, as well as Kencel and one of Churchill's largest investors, Bear Stearns Merchant Banking.

While Churchill Capital and Churchill Financial were not formally affiliated, other than through their founders, their business objectives were somewhat intertwined. Churchill Financial managed the mezzanine funds, while Churchill Capital originated and structured mezzanine deals. Both firms were calling on the same middle market sponsors and having Churchill Capital's mezzanine business as part of the finance company would provide the firm increased opportunity and access to deal flow, Kencel said. "When we looked at what made the most sense from a value creation standpoint, we felt that we should have Churchill Capital's mezz business as part of the finance company," Kencel said. "It was a decision to put under one roof what already was closely affiliated. We thought, Hey, we have been engaged for a year, it's about time we just got married'."

A steady stool

Churchill Capital's mezzanine business, which has been structuring mezzanine transactions for twenty years with about $1 billion in investments over that period, will continue its previous business strategy. However, Churchill Financial will now operate under three individual businesses, including the firm's middle-market lending business that continues to be run by George Kurteson; Churchill Pacific, which is the CLO asset management business run by Heather Creeden; and Churchill Capital's mezzanine business that will continue to be run by Michael Hahn. "Now we have three legs to the stool instead of two, it really made a lot of sense," Kencel said.

While Churchill Capital brought over the "core" team from its mezzanine finance business, including all of its senior management, Churchill Financial has plans to continue the business' growth. The firm is looking to bulk up with hires from New York and California, along with other additions from the middle-market lending business, Kencel said. The mezzanine group will continue to be based in Minneapolis.

Churchill Financial, headquartered in New York, provides debt financing to middle-market companies and manages CDOs and other fixed income fund portfolios. The firm has over $4.5 billion in assets under management. The mezzanine finance business originates structures and manages subordinated debt investment funds for middle-market companies throughout North America.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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