Tom Finke is used to juggling multiple responsibilities. Not only at the office, with eight CLOs currently under management, but also at home keeping track of five kids. Though he is highly organized during the week, come Friday afternoon, Finke turns the reigns over to his wife, Heather, who arranges his soccer, basketball, baseball, birthday party and play date carpool agenda. And don't worry about his personal health. "With five kids there is no lack of physical activity," he said.
During the week, Finke focuses on raising equity and monitoring his current interests. As managing director and head of Babson Capital's bank loan team, Finke's general philosophy on loan investments rests on fundamental credit analysis - not just upfront but on an ongoing basis. And these principles start with a good credit discipline and a well diversified portfolio of loans, according to Finke. "You need to have solid credit underwriting and disciplined credit monitoring," he said. "Most deals look pretty good on the day they are syndicated. It's three, six, nine months down the road that things happen." And with defaults almost inevitable, well-diversified investments assure that no one position is going to take you down, Finke said. "You don't get rewarded for overweighting loans. You are just buying a piece of paper at par and getting a coupon. These positions typically do not trade to 110 (percent of par)."
Finke also takes into account various lending scenarios, shying away from investments where lending is either against questionable cash flow or unrealistic cash flow growth. "We look at the quality of the cash flow, which ties into the business model and the viability of that model," Finke said. "It comes back to the credit fundamentals. What are the fundamentals of the industry? The fundamentals of the company? The quality of the cash flow? And then how much are you trying to leverage that (cash flow) and are you comfortable with that leverage in a senior position?"
Another important factor for Finke is management experience, including experience operating the company and operating with a levered balance sheet. And in the leveraged finance market, with so much deal flow coming from financial sponsors, who is doing the deal, is often another consideration. "Are they a top sponsor firm, do they have a particular expertise in this industry?" Finke said.
Equal opportunity lender
Finke does not discriminate between the smaller middle-market deals and the larger megadeals of late, equally examining both credit profiles. "You do look at [smaller and larger deals] differently, but at the end of the day, if you're comfortable with the credit, you buy that loan." However, with the heftier debt packages, which every dealer will trade, a period of underperformance could create price volatility on a scale that could upset the market, Finke said.
Diversification has characterized Finke's entire career. His introduction to the credit market began at First Union Corp. in the late 1980s, with the boom of highly leveraged transactions and the Michael Milken days of the junk bond market. When the industry blew up in 1991, and the leveraged loan market began to reform itself in 1992, Finke was also a participant.
"That is part of what has been fun about the career, to be in a market that has been evolving dramatically and going from stages of limited liquidity centered around the banking industry to a capital market," he said. "Most leveraged loans today are sold down to institutions, as opposed to banks, in broadly syndicated deals."
Once a banker, always a banker
Finke has been in banking since his start, in particular loan syndication sales and trading. After graduating with a B.A. from University of Virginia's McIntire School of Commerce in 1986, Finke went to work for First Union Corp. for several years before moving in 1988 to New York-based West Back Banking Corp., where he became a junior lender. In 1989, Finke went back to get his M.B.A. at Duke University's Fuqua School of Business. Though he was looking to broaden his experience by examining other industries such as real estate, Finke ultimately realized his future lay in banking, and after graduating in 1991, he went to work for Mellon Bank, where he was introduced to the world of loan syndications and sales.
After a vice president position at Bear Stearns, Finke moved to First Union Securities in 1997, where he started the par loan trading desk. In 1998, Finke left his job as head of trading at First Union, moved out of capital markets and co-founded Institutional Debt Management (IDM) with Mark Mahoney, who is currently at Gulfstream Financial Corp. The firm was developed with the basic business plan of becoming a buy side loan manager using CLOs as a method of fundraising. Between the fall of 1998 and the fall of 2000, IDM successfully raised six CLOs and one CDO with total investments of $3.6 billion. Finke started at Babson Capital in 2002, after the firm acquired IDM, and it is essentially the business he runs today.
The evolution of Finke's CLO business has coincided with the evolution of the industry. The recent expansion in investment products, second lien loans in particular, has not only added to the range of investment options that lenders have but has also altered Finke's financing strategy.
"The second lien market certainly has affected the loan market in general," Finke said. "It has affected the mezzanine market and the high yield market, it has become another form of subordinated financing for issuers to use." An important outcome of the introduction of the second lien product has been to force investors to consider the total leverage and how the intercreditor agreement will work between the first and second liens. "Even if you just buy in the first lien, your analysis is affected by what you think of the second lien," Finke said. "You have to look at intercreditor agreements and understand the rights that second liens have relative to first lien lenders. Often we do not view a second lien loan as being truly subordinated like high yield bonds."
Finke's team in Charlotte, N.C., focuses heavily on leveraged loans, while Babson maintains a high yield group in Springfield, Mass. However, in Babson's credit opportunities fund, though primarily used for loan investments, Finke said the group will buy bonds or floating rate notes that they feel are appropriate.
As the market heads into 2007, Finke does not see new issuance dropping off anytime soon. "I do not see anything slowing down, with the deal flow we continue to see a lot of leveraged buyout and merger activity." Whether that will sustain throughout 2007, it is hard to predict, Finke said. "In the visible future it continues to feel like a strong issuance market."
To be sure, Babson just closed its fifth CLO in two years, Babson CLO 2006-II. The deal, which was originally slated to be $500 million, was upsized to $550 million based on oversubscription of equity from both U.S. and international accounts. And it marks the second time that Babson Capital has topped the $500 million market this year. In June, it closed a $575 million CLO, Babson CLO 2006-I. Pricing on the debt was at Libor plus 38 bps, with the BBB and BB tranches pricing at Libor plus 140 bps and 340 bps, respectively. The fund will be comprised of at least 95% of broadly syndicated senior secured bank loans. Wachovia arranged the transaction.
The model was similar to the Babson's previous CLOs, Finke said. "We brought a straightforward, plain vanilla CLO, and as a result continue to get very tight pricing on the liabilities," he said. "We believe that the pricing level of liabilities is enormously attractive, and to lock those in at market tights makes an attractive proposition for equity."
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