GSO Capital Partners and Franklin Square Capital Partners have formed a strategic relationship with NewStar Financial, a mid-market lender and asset manager, announced the commercial lenders. Under the agreement, funds managed by Franklin Square, and sub-advised by GSO, will purchase $300 million of 10-year subordinated convertible bonds issued by NewStar.
The deal is designed to increase NewStar’s available capital, facilitating asset growth, both by boosting its capital and opening up the mid-market lender’s services to Franklin Square and GSO portfolio companies, including equipment leasing and asset-based financing. With exposure to a middle-market lender, GSO and Franklin Square will also expand their presence in middle market lending.
The subordinated convertible debt is structured as PIK-toggle notes, meaning NewStar can opt to add the 8.25 percent cash coupon to the principle and repay at the end of the 10-year maturity. The $300 million 2024 subordinated notes are junior to NewStar’s existing and future senior debt and include warrants exercisable into 12 million common stock shares at a price of $12.62.
The relationship is anticipated to provide both sides with cross-referral and co-lending opportunities. GSO and Franklin Square, separately, could also invest more capital into future debt funds managed by NewStar, said the statement.
“This strategic relationship is nothing short of a game changer for NewStar. With $300 million of long-term capital and a significant equity stake in NewStar, I believe that our goals and objectives are perfectly aligned. Our investment styles and credit culture are very compatible and we are already working together effectively to provide larger capital commitments to our clients and open up new channels of origination through the broader GSO and Franklin Square platforms,” said Tim Conway, NewStar's chief executive.
Three Franklin Square funds have committed to purchase $200 million of the NewStar debt before the end of the year, and the remaining $100 million will be purchased within 12 months in tranches of at least $25 million, at the request of NewStar. The notes are callable, at a premium, for the first five years, and callable at par after year five.
The conversion warrants are subject to shareholder approval.
Boston-headquartered NewStar specialises in providing corporate debt financing to mid-sized companies. It originates loans and leases directly with hold positions of up to $50 million, taking larger exposures on a case-by-case basis. The firm has regional offices in Atlanta, Chicago, Dallas, Darien, Los Angeles, New York, Portland and San Francisco.
GSO Capital Partners is the credit and distressed investment arm of Blackstone. It has around $70 billion in assets under management.
The FS Investment Corporation is sub-advised by GSO in three listed and unlisted business development company vehicles that handle about $13 billion.