When Solar Capital Ltd., a business development company, announced it agreed to acquire Crystal Capital Financial Holdings LLC (Crystal Financial) in December 2012, Michael Gross, chairman and CEO said, “We believe that Crystal Financial offers a compelling opportunity for us to invest in an established business whose management team has an exceptional track record.” Gross added, “We have known the Crystal Financial management team over the course of our careers and have confidence in their long-term strategy for prudently growing their business.” Solar invested $275 million to effect the acquisition and the current management team of Crystal made a meaningful investment as part of the transaction.
In a news release on quarter and fiscal financial results ending December 31, 2013, Solar Capital Ltd. noted that 2013 was a year of issuer-friendly market conditions. The company focused its attention on floating rate, senior secured loans, which “meaningfully enhanced the composition of [its] portfolio.”
Solar Capital said it benefitted from its strategic ownership of Crystal Finance, “whose 100% performing portfolio of senior secured loans resulted in an 11.5% cash yield, based on cost, for the full year.” At year-end 2013, Crystal’s senior secured loan portfolio totaled approximately $465 million, encompassing 27 funded commitments to 23 borrowers. All of its investments were floating rate.
ABFJ: How was your first year of operations under Solar’s ownership?
WM: Solar Capital Ltd. invested in Crystal at year-end 2012, and I know that both the Solar and Crystal teams are very pleased with our performance in 2013. It was very clear from the onset that Crystal would continue to be in a great position as a leading underwriter of secured debt for clients that require a financing commitment that entails quick decisions and flexibility. The transition was seamless. Crystal and Solar operate as distinct independent entities; each source, structure, underwrite and manage their own credits. In addition, we now have the benefit of an equity owner with access to permanent capital. Crystal has maintained its focus on providing secured loans to middle-market firms that are experiencing some type of event whether it is M&A driven or navigating through significant operating transition. We also work with many successful, growth oriented businesses that in many cases are part of industry segments that are “out of favor.”
ABFJ: Was 2013 a success?
WM: Yes, 2013 was an excellent year for Crystal. We exceeded each of our financial and operational objectives, and we built a strong relationship with the Solar Capital team. During the year, we originated in excess of $350 million of commitments, expanded our team and increased the size of our credit facility. These results put Crystal in a great position to continue growing our business.
ABFJ: Can you share some examples of the types of transactions you financed last year?
WM: During 2013 the Crystal team underwrote new transactions in industries that are currently out of favor with more traditional lenders. For example, the newspaper publishing industry is going through significant changes and we have closed a number of transactions in that industry. Companies operating in industries perceived as less attractive often have challenges finding capital because the financing needed doesn’t fit squarely into a traditional ABL or cash-flow “box.” Our team of professionals has experience with both asset-based and cash-flow financings and our ability to blend the underwriting disciplines from both products allows us to provide solutions for these types of borrowers. For example, there are some businesses where the enterprise value story may not be strong enough to support a cash-flow loan but with our comfort lending against assets, we can look at the value of this collateral as additional protection in a downside scenario. Another example is the consumer finance industry that is evolving and expanding through many new participants and products. Crystal has been able to find several new opportunities in that space, supporting companies that are fulfilling the needs of customers who are underserved by the traditional retail banking.
ABFJ: The Crystal team has a long history as an independent specialty finance company. What have been some of the highlights?
WM: Yes, our history goes back as far as 1992 when our team came together to start a specialty finance company that was focused solely on providing asset based loans to retailers. That business was sold to Bank of Boston, which in turn was acquired by Fleet Bank in 2001 and then Bank of America in 2003. Our specialty finance business was subsequently merged into the retail/consumer investment banking platform at Bank of America. At Bank of Boston, our team also started Back Bay Capital, a fund focused on junior secured loans and FILO (first-in, last-out) tranches of debt. Back Bay became a leading provider of junior capital to middle-market companies and after a successful 10-year track record, the team then moved on to establish Crystal as an independent entity in 2006. Today, we have 25 professionals focused on providing senior and junior secured loans to borrowers across all industries. Since our formation in 2006, we have provided over $2.0 billion in commitments to 120 portfolio companies. In addition to our primary lending platform, in 2013 our team established an SBIC, which provides us with the ability to underwrite new loans for smaller companies throughout the United States.
ABFJ: What are your views regarding the asset-based debt capital markets?
WM: First, we have seen examples where some traditional lenders will incorporate non-traditional assets in the borrowing base. I’m talking about lending on intangible assets such as brand names, customer lists, intellectual property, etc. The borrower therefore is able to obtain additional liquidity at a very attractive cost from an asset class that was historically ignored. The asset-based loan as a product has achieved a level of acceptance both by companies due to depth of market, attractive pricing and flexible structures as well as the regulators because it is a relatively safe asset class with historically low loan loss ratios. As a result, it is an asset class where most institutions want to see growth that is in part creating the heightened level of competition and therefore has made it quite difficult to deploy capital. Structures are aggressive and there has been significant price compression. We don’t see this dynamic changing in the near term at least until interest rates rise or there is some other shock to the system.
ABFJ: Given your history, Crystal has experienced many different macro business cycles. Have you had to change your product or market positioning?
WM: From our inception, Crystal has positioned its business to be a reliable underwriter of secured debt no matter what type of economic environment we are experiencing. In more challenging periods, when the debt markets are choppy and the high yield market isn’t reliably “open,” we have often been a resource to larger companies. Conversely, even when the economy is strong and the debt markets are frothy and favor the borrower, we can still be active either providing growth capital to businesses operating in “out of favor” sectors or working with companies that are experiencing some type of business transition. Regardless of the business climate, our go-to-market strategy has always been consistent. We have a very robust origination effort with dedicated, seasoned credit professionals who identify opportunities from a wide variety of referral sources. We can be most impactful when there is a potential new client that values our ability to provide incremental liquidity through a due diligence process focused on collateral, loan and legal structure and cash flow. Our ability to find or see value where others don’t, to deliver on our proposed structures and to close quickly is at the core of our product and how we execute.
ABFJ: What are your thoughts regarding 2014 and beyond?
WM: Most lenders you speak with today lament how competitive the market conditions are which currently favor issuers. A key question in the minds of most professionals in our industry is whether increased regulatory focus and scrutiny will impact the lending appetite within banks. There is a significant push by the OCC and the Fed to make sure the markets don’t overheat like they did in the 2006-2008 timeframe, but there has not yet been any clarity as to what changes or limitations might be made to middle market lending and in particular, asset-based lending. I suspect it will begin to show up towards the end of 2014, and we will be well positioned to support borrowers that are unable to get the appropriate amount of credit from traditional lenders. In the meantime, the current frothy market conditions will create challenges for all lenders to deploy capital at attractive risk adjusted yields. Nevertheless, with our focus, capabilities and historical track record, we believe Crystal is well equipped to not only survive, but thrive.
Ward Mooney is chief executive officer at Crystal Financial. Prior to forming Crystal in 2006, he founded various specialty finance businesses at BankBoston, Fleet Bank and Bank of America.