Gladstone Capital Corp., a newly organized finance company, said in an N-2 filing with the Securities & Exchange Commission that it will securitize mezzanine loans made to private equity-backed companies.
Virginia-based Gladstone is currently trying to raise equity through a public offering: 12.4 million shares at $15 each, for $186 million in capital. An additional 1.86 million shares in manager over-allotment would bring that total to $213.9 million.
First Union Securities and UBS Warburg are named as joint leads on the stock offering.
Following this offering, Gladstone plans to invest primarily in senior subordinated debt from companies that are backed by leveraged buyout and venture capital funds.
The company was founded in March by David Gladstone, who is also currently a vice chairman of American Capital Strategies (ACAS), the finance company that brought the first securitization backed by mezzanine, middle-market business loans last December.
That deal, which lead manager First Union coined a "commercial business loan" (as opposed to small business loan) securitization, was worth approximately $120 million. ACAS is said to have another deal in the works, also via First Union.
First Union, currently the only bank known to have a commercial business loan ABS platform, pegs the asset class between conventional small business lending and bank-balance sheet CLOs.
In a research report the bank released in April, author Russell Hurst writes, "In a much smaller way than a CLO, these collateral pools represent diversified corporate repayment obligations."
However, unlike conventional small business loans, this debt is often mezzanine, which can give the lender an equity position in the company. The lender may even have board voting rights or other management capabilities, which adds another level of control over the investment.
According to Kent Becker of Moody's Investors Service, which rated ACAS Business Loan 2000-1, another primary difference between the mezzanine-backed deals and small business deals is the size of the companies that make up the loan pool.
"The borrowers in the ACAS pool are substantially larger than borrowers in small business loan pools, with average annual sales of over $100 million," Becker said.
"From a default perspective, originations of American Capital Strategies dating back to 1986 have experienced lower defaults relative to small business loan pools," he continued. "However, recoveries on ACAS defaulted loans may be highly variable due to their subordinate position."
Gladstone has been in the debt and equity financing business for more than 25 years, and was CEO of Allied Capital until 1997. Additionally, Terry Brubaker is Gladstone Capital's president chief operating officer. Burbaker worked at James River Corp., with expertise in acquiring and managing companies.