Investors flock to Babson fund

Leveraged loan investor Babson Capital has rolled out its first dedicated mezzanine fund as pricing begins to settle against background of interest rate uncertainty.

Babson Capital Europe, one of Europe’s largest leveraged loan managers, has held a final closing of its first dedicated European mezzanine fund, Almack Mezzanine I, at €800 million ($1 billion).

The fund’s close coincides with a change in sentiment to mezzanine pricing, according to Ian Hazelton, the firm’s chief executive. He said: “We are at a turning point. One or two deals are not clearing and the spreads are creeping down. Pricing is settling at a level over 900 basis points. But there is a huge variety of risk profiles. Some you would want 1200 points over, some 900.”

The fund will target both large and mid-market mezzanine investments in the UK and continental European markets. It has already bought assets worth €348 million with a strong pipeline of opportunities for the third quarter this year.

Hazelton said investors liked that the fund had already put money to work, because it showed it was not a fee generation fund.

The Almack fund is structured to take advantage of all mezzanine options available. Hazelton said 70 percent of the fund would invest in senior, cash-paying mezzanine with payment-in-kind notes or warrants. He said 20 percent of the fund would invest in PIK notes and the remainder would target equity stakes.

The fund’s managers will invest in selective credits seeking best relative value, though according to Hazelton this will become harder. He said: “The forward calendar is very strong, although leverage is challenging and in some transactions there a sense it is a bridge too far against a rumbling background of rising base rates.”

Almack has 16 investors including insurance companies, fund of fund investors, international banks and pension funds.

Babson Capital Europe has been investing in the European mezzanine market since 2001, and now has one of the largest teams in Europe focusing on senior secured loans and mezzanine.  The mezzanine team is led by David Wilmot and Adam Eifion-Jones.