While bigger competitors have been cutting back in leveraged finance amid a decline in trading volume and slack underwriting, KeyBanc Capital Markets, the debt capital markets group of Cleveland-based KeyBank, continues to build out.

In early September, it hired three former Bank of America Merrill Lynch bankers for its syndicated finance team. Robyn Roof joined the investment bank along with Jef Fowler and Tracey Guice, with the goal of expanding the loan syndicate function. Roof heads up the effort along with Edward Corletzi, head of loan sales.

KeyBanc is still a relatively small player in syndicated loans; it ranked 19th at the end of the third quarter, although its deal volume has climbed, to $5.7 billion via 53 deals at the end of September from $5.2 billion via 35 deals by the same point in 2010, according to Dealogic. But it has been taking a bigger role in some recent transactions. The firm recently launched syndication of Preferred Sands’ $430 million in loans on the right of the deal, along with Barclays Capital. It has also committed, alongside CIT Group and NXT Capital, to finance JLL Partners’ $398 million buyout of American Dental Partners. 

Prior to joining KeyBank, Roof spent nearly 20 years at Bank of America Merrill Lynch, most recently as a senior vice president for restructuring. She also served as a managing director for U.S. loan syndications for more than seven years. Leveraged Finance News spoke with Roof to get her sense of the state of the leveraged finance syndication markets and ask her about the challenges that lay ahead for her group.

LFN: What is KeyBank’s approach to leveraged finance syndication?

Roof: What attracted me to KeyBank is really its consistent focus on the leveraged finance business. We’ve got your i-banker coverage, your research analyst platform, and a consistent sponsor effort, and that results in more of a consistent leveraged finance business. Our approach is: you marry up the three and you focus on what we know well, which is deep dives into various industries coupled with some of our sponsor relationships. All of the sudden we’re doing more left-lead deals.

What differentiates KeyBank’s platform?

We’re not doing anything that’s taking on an insurmountable amount of risk. We are industry focused, and some of them are straight down the fairway of our footprint, and so we do a lot of industrial business just by the nature of KeyBank’s footprint. That affords us some good opportunities. We had a very strong industry banker on a recent transaction that came from Wachovia, who was deep into a transaction that we are now in the market with. Our expertise in front of those sponsor relationships that drill down in what we knew about the industry afforded us a new opportunity that a couple of years ago KeyBank wouldn’t have [had].

Do you find yourselves competing with or partnering with new syndication groups in the loan market?

The most recent transaction that we did was with [Australia-based] Macquarie. That can be considered a new platform. They haven’t been very active [in the U.S.]. They’re trying to build their platform. We’ve done some things with Prudential on some of the smaller, middle-market transactions and one of the larger middle-market transactions was done with Macquarie to the left.

Had Prudential not been that active in smaller, middle market transactions?

Prudential is a pretty big machine but there is a group that is focused on the middle market. They do mezz lending specifically. They’re very big in private placement, and they’re big in mezz. KeyBank will distribute or pair our sponsors up with mezz investors but we will not underwrite that product. So we find mezz investors like Prudential to joint venture with.

Are you seeing new buyers in the leveraged loan market? If so, what kinds of groups are there now or what groups/buyers are you seeing more of?

There are teams which, while they are new buyers, it’s the same guys with a different moniker. Let’s dissect that a little bit. You’ve got your commercial finance companies that are coming back, so CIT has had its issues but now they’re back in the game. GMAC is now Ally but they’re very back in the game of the commercial finance company and then there are new names like NXT, and we’ve visited the old Dymas Capital guys that were a commercial finance company that are now at Kayne Anderson. So new buyers, yes, because there’s new money being raised and there’s new capital, but it’s the same old people in the business.

Do they have the same approach as before? Is it different working with them now?

That’s what’s really beautiful about it. We’ve all been in this business a long time, and you know people well and you know how they think about credit and how they think about the different industries and approach different transactions. So it’s actually good because there are more people instead of a big group… The other types of buyers we see new coming into the market are the BDCs [business development companies] like Stoller Capital, Monroe. Gollub’s come on strong in the last several years. There are 18 or so BDCs in registration, so that’s also a strong commitment to the middle-market investor base. Just [recently] NXT raised another $318 million to commit to the middle market, and AEA raised a $375 million middle-market fund.

Where is that new capital coming from?

It’s a lot of individual investors. It depends on how [the new funds] are structured. There are a variety of structures. Some may have individual pocketbooks. Some have checkbooks from big insurance companies. Some have checkbooks from various corporate limited partner entities. It varies.

How closely do you work with your high yield sales and trading team?

I am the first person in my product that was hired into New York and part of that focus is because our high yield team is here in New York is well. That team is being run by a gentleman named Ray Limanski. …Ray and I work very closely. … One thing that’s always important when you look at the connection between the loan business and the high yield bond business is that we all report up to the same person, who is Amy [Carlson, head of debt capital markets] and then the loan trader will be sitting on the New York desk as well.

What’s going to differentiate KeyBank from going the way of other groups that built up their leveraged finance teams only to cut them back several months to a year later?

Some of our competitors have access to capital; some do not. Those that do not have access to capital or are financed differently have certain pressures. We are a bank, so we do have access to capital. Some have investment banking capability and have that industry focus; some do not. KeyBank does. Having a successful financial sponsor relationship is important. … We’ve had some success bringing some of our house accounts that may have been public that want to go private. Because we brought them the idea and have a relationship with the sponsor, we’re able to play a big role in that financing transaction.

Are you starting to see things change after the large inflows we’ve seen into high yield bond funds?

I’m hoping the loan funds follow high yield. Whether or not they decouple at some point, there’s still a correlation there, where the loan market tends to follow the high yield market. We’re watching from the sidelines but hoping the retail funds start to see some return to positive flows. We’re hopeful, but that retail money can turn on a dime.

Are you starting to see things such as call protections added to leveraged loans? Are there other bond-like features becoming more common for loan deals?

Yes. Through the challenging time that we had going into Labor Day and after Labor Day, we did see typical soft call provisions, second-liens are showing more bond-like provisions. Call protection is getting to be standard in the flex packages. There has been over a period of the last couple of years a flight to covenant-lite loans, but you’ve seen most of that dry up here in the last market destruction.

Are there any trends you think leveraged finance investors or bookrunners need to be aware and proactive about?

The interesting thing is that the unitranche structures are more of a competitive threat. … Because of the market disruption, the sponsors are choosing to go with more of a unitranche product, which is one document. That is a trend over the last couple of years that has made it a little tougher to compete.

Would your group be able to do unitranche?

The devil is in the details of that product. We are talking to people to learn more about how we may be able to play a role but KeyBank has not ferreted it out yet. We’re in a position where we’re open-minded, but we’re a bank. We’re not a finance company, and we’re not a fund. We have certain regulatory issues that we must maintain.

What is the biggest challenge facing the leveraged finance markets today?

It’s the uncertainty. It’s that CLOs came on strong and then middle-market CLOs started to follow. So there is some middle-market CLO money where we play. The technicals right now are pretty strong. Loans that are breaking and trading up. The fund flows are starting to turn positive in the middle market. There’s not that much product out there. So you kind of scratch your head and think things should be flying off the platform. Investors and issuers and arrangers are all very cautious. If I talk to other arrangers, some of the pricing out there would indicate some of the volatility is built in, but the markets are up and down. … The biggest challenge right now is the crystal ball effect and the volatility to be able to write committed underwriting for businesses that are making acquisitions and need financing and long-term committed capital.

 

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