NewStar to buy Fifth Street CLO arm in latest consolidation

The transaction comes as Fifth Street is in talks to sell management of its two business development companies.

NewStar Financial has broadened its operations with the purchase of Fifth Street Asset Management’s collateralised loan obligation arm in a deal valued at $29 million.

Boston-based NewStar said it would add an additional $726 million assets under management by purchasing the CLO department, bringing pro forma AUM to $7.3 billion, according to the statement. As part of the deal, which is expected to close mid-third quarter, the buyer would pay $16 million in consideration, a portion of which will pay down Fifth Street's credit facility, and assume $13 million of debt.

Fifth Street 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.

The vehicles, both of which have a four-reinvestment period, targeted mid-market senior secured loans originated by Fifth Street, according to announcementsat the time. Both CLOs were required to hold 95 percent of their portfolios in senior secured loan and 5 percent second lien loans, Moody’s analyses of the two CLOs showed.

“Over the course of FSAM's strategic review, it became clear to us that given the market environment and headwinds we faced over the past year and a half, it would be difficult to scale our CLO business,” Leonard Tannenbaum, Fifth Street’s chief executive officer, said in a statement.

A representative from the seller could not be reached for further comment.

NewStar, led by Timothy Conway (pictured), would look to integrate management of the two CLOs with is current mid-market loan management team and rotate NewStar-originated assets into the portfolios, according to a source at the firm. In addition, it may refinance or reset the transactions if doing so would benefit the vehicles’ investors.

The firm also issues its mid-market CLOs. Last year it issued the $505 million NewStar Berkeley Fund CLO in November and September and the $348 million NewStar Commercial Loan Funding 2016-1 in March.

Dechert represented Fifth Street in the transaction, while Seward & Kissel served as legal counsel to NewStar, according to statements disclosing the transaction. Fifth Street engaged Natixis Securities America as its financial advisor for the deal, while NewStar hired investment bank GreensLedge Capital Markets. A portion of the $13 million being assumed is owed to Natixis, a source familiar with the matter said.

The sale comes a week after Fifth Street said it is in discussions over the potential sale of the management of its two publicly-traded business development companies, Fifth Street Finance Corp. and Fifth Street Senior Floating Rate Corp.

The statement came on 30 June, a day after The Wall Street Journal reported that Oaktree Capital Management is close to a $350 million buyout of Fifth Street. Such a purchase by Los Angeles-based Oaktree would be the firm’s second foray into the BDC world, with an initial effort in April 2011 that was subsequently abandoned.

Fifth Street Finance has seen its net asset value per share, a key metric for BDCs, consistently decline, as it fell from $9.81 as of the first quarter 2014 to $7.23 as of 31 March, according to US Securities and Exchange filings.

Fifth Street Finance recently adopted changes to its fee structure, cutting its incentive fee by 25 percent each quarter after any realised and unrealised losses and lowering its hurdle rate from 8 percent to 7 percent. The firm rolled those changes out in February and they were approved in March.

Fifth Street Floating Rate has also seen its NAV per share tumble over the last three years from $15.13 at the end of first quarter 2014 to $10.83 as of 31 March, additional SEC filings showed.

Fifth Street’s sale of its CLO arm represents just the latest consolidation transaction in the alternative credit space.

In 2016, CION Investments purchased the Credit Suisse Park View BDC, formerly affiliated with the Swiss investment bank, for almost $280 million, while Benefit Street Partners acquired Business Development Corp. of America. In January, Ares Capital Corp.’s $3.62 billion merger with American Capital closed, the largest ever BDC deal ever.

There have been other high-profile mergers in the private credit world which ultimately didn’t pan out, including the $2.55 billion acquisition of Kayne Andersson Capital Advisors by Ares Management, which the firms announced in July 2015 and called off three months later.

TPG Specialty Lending to also made overtures to purchase Triangle Capital Corp., which the target rebuffed. As a result, TPG exited the majority of its Triangle common stock, TPG’s co-chief executive officer Michael Fishman said on a February earnings call