First Eagle to purchase NewStar, GSO to buy $2.4bn portfolio

The merger and portfolio sale follow an effort by NewStar to turn itself into an asset management firm.

NewStar Financial has agreed to sell itself and a portion of its portfolio, transactions that come after assertions from the Boston-based firm’s management that its stock is undervalued and amid promises to “unlock value for shareholders”.

First Eagle Investment Management has agreed to acquire the Boston-based mid-market lender for a consideration of $12.32 to $12.44 per share, the firms announced on Tuesday, which would amount to a deal value of $512.6 million-$517.6 million. In a related transaction, GSO Capital Partners has agreed to buy a $2.4 billion portfolio of mid-market loans and credit investments, which would continue to be serviced by NewStar’s investment team post-closing.

NewStar’s senior management and investment professionals would remain in place the closing of the deal though whether it would be under the First Eagle or NewStar name had yet to be decided, a spokesman for the purchaser said. A NewStar spokesman said the deal would close in the fourth quarter of this year or first quarter of next year.

“Together these transactions accelerate NewStar‘s strategy to transform from a balance sheet driven commercial finance company into an investment manager of third-party assets, while unlocking the value of our portfolio investments and asset management platform for stockholders,” NewStar chief executive officer Tim Conway said in the statement.

The per-share purchase price would represent a 10.4-11.5 percent premium over NewStar’s three-month volume-weighted average price of $11.16. The consideration includes an upfront cash payment of $11.44 per share along with a distribution of any tax refund received as a result of the application of a loss carryback related to its portfolio sale to New York-based GSO. First Eagle’s purchase of NewStar is conditioned upon the GSO transaction.

The transactions are subject to higher-and-better offers for 30 days, a period that ends on 15 November.

First Eagle would fund the purchase through balance-sheet cash, the assumption of NewStar debt and the proceeds from GSO’s acquisition of the NewStar portfolio. For its part, GSO secured $950 million in equity commitments for a new fund that was formed to facilitate the purchase. Blackstone Group’s New York-based credit arm also obtained a $1.85 billion asset-based revolving credit facility.

GSO declined to say whether it purchased NewStar’s portfolio at par or at a discount.

The two firms have had an existing relationship for at least the past three years, when the FS Investments’ business development companies, which are sub-advised by GSO, purchased $300 million of 10-year subordinated notes from NewStar and warrants for 12 million shares at $12.62 per share.

Over the past two quarters, NewStar senior management had hinted the company might be on the block. The first- and second-quarter earnings calls, chief executive officer Tim Conway said the firm was looking to “unlock value for shareholders”, which could include the “monetisation of the investment platform independent from the value of the balance sheet”.

In recent months, Conway has maintained the firm’s share price, which closed at $12.13 on Monday, was undervalued.

“We manage $7.3 billion and we’ve got a really valuable portfolio of loans on our balance sheet,” he said on August’s second-quarter earnings call, according to a transcript. “I don’t think our stock price reflects that inherent value, and so we will continue to look at ways, if we have to, to get that value monetised.”

He echoed similar thoughts at the end of last year, upon the divestiture of its equipment finance business to Radius Bank, which he said “further demonstrates the intrinsic value of our direct lending platforms that we believe is not fully recognised in our current share price”.

The sale to First Eagle also comes after a series of moves over the past 18-plus months that were designed to let NewStar focus on its core mid-market lending operations.

Alongside the $140 million all-cash sale deal with Radius, Sterling Bancorp bought NewStar’s asset-based lending business in March 2016 for $112 million cash. NewStar’s statements on each transaction asserted the deals showed “demonstrates a continuation of the company’s transformation” from a diversified commercial finance company into a mid-market direct lender.

In July, NewStar expanded its mid-market capabilities in June when it purchased Fifth Street Asset Management’s collateralised loan obligation business for $29 million. The seller managed two CLOs each issued in 2015: the $309.5 million Fifth Street Senior Loan Fund I, which closed in February of that year; and the $416.6 million Fifth Street SLF II, which closed that October.

NewStar invests in senior secured and unitranche loans and also makes equity co-investments. The firm focuses on deals involving private equity-backed companies and specialises across a number of industries, including healthcare and health services and software and technology.