Golub Capital adds 'late-stage' unicorn lending to ABS platform

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Golub Capital Partners has priced its first-ever securitization of loans issued through its “late-stage” lending program for promising, venture-capitalized software firms.

The middle-market capital specialist will be collateralizing $340.8 million in loans through a new asset-backed note structure being managed by an affiliate of its middle-market collateralized loan obligation (CLO) manager.

Most of the loans securitized in the Golub Capital Partners ABS Funding 2019-1 portfolio are from the late-stage program that underwrites newly launched firms in the software-as-a-service (SaaS) sector.

Unlike the corporate loans offered through its standard underwriting, the late-stage loans are for funding VC-backed startup firms that have not yet developed earnings or have low loan-to-value ratios.

The loans to these unicorn firms have much lower debt-service levels and about half the LTV ratios of the middle-market firms that Golub traditionally serves. And Kroll Bond Rating Agency has assessed the loan’s credit quality in the triple-C category, presenting higher risk and potentially lower recoveries for investors.

But the loans offer investors greater growth opportunities, and Kroll notes the strong performance of Golub Capital’s late-stage loan program since its founding in 2013: zero defaults and no credit losses in the 40 loans issued to date totaling $2.5 billion, according to Kroll. The loans in the pool are from 37 obligors.

The capital stack includes a $208.57 million Class A notes tranche yielding 4.75% interest, with a preliminary A rating from the agency. Golub, through its GC Investment Management affiliate, will also securitize $133.35 million in subordinate notes. The report did not state whether the notes would be retained, but issuers of middle-market/small enterprise loans typically retain substantial portions of deals on their books to share "skin in the game" with investors.

GC Investment Management is a unit of GC Advisors, which manages loan portfolios issued through Golub’s middle-market collateralized loan obligation platform.

The deal will launch with a 61% advance rate on the collateral.

According to Kroll, Golub’s late-stage loans are underwritten to “realized or contractual” recurring revenue, rather than earnings that are the basis of the its middle-market loans that make up the bulk of activity for the firm, which has over $30 billion in capital under management.

Golub markets the late-stage loans as “flexible credit solutions” that provide working capital for firms without requiring the surrender of further equity. The program “offers entrepreneurs and executives the opportunity to finance their future without diluting their ownership,” and encourages portfolio companies to “take control of their growth, make strategic acquisitions and expand their product offerings.”

Up to 75% of the collateral in the new Golub deal can consist of late-stage loans during its two-year reinvestment period. About 75.5% of the par collateral of the deal involves obligors that the issuer has classified as software (61.4%) or health care services/technology (14.5%).

GC Advisors is a frequent issuer of middle-market CLOs, having earlier priced six deals totaling approximately $3.9 billion in 2019.

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