In late September and early October, business journalists began offering their readers something that had been noticeably absent for some time: a bit of good news. In article upon article, pundits from The Wall Street Journal, The New York Times, Forbes and other leading publications seemed to be saying much the same thing: that banks were starting to lend again.
Reporters cited data showing corporate lending up 7.2% year-to-date over 2010, and they talked to bank executives who were more than happy to challenge the assertion — repeated regularly since the economic bailout three years earlier — that despite receiving billions of dollars of taxpayer cash, the big lending houses had been sitting on their hands, and more importantly, their checkbooks.
“The narrative that banks aren’t lending is incorrect,” insisted Timothy J. Sloan, Wells Fargo’s chief financial officer, in an October 17 interview with the Times. “Lending is strong.”
And in fact, there seems to be evidence to back that up. According to the Federal Reserve, commercial and industrial lending grew by 4% in September and was up 35% in the third quarter over the prior-year period. For the week ending October 12, U.S. banks’ C&I loans increased $1.8 billion to about $1.31 trillion, the Fed said, and as recently as October 28, Bloomberg reported that average commercial lending at three big banks — U.S. Bancorp, PNC and Regions — grew by double digits in the third quarter.
That sounds pretty encouraging; and, according to Ward Mooney — a 30-year veteran of the commercial finance sector and chief executive officer of Boston-based Crystal Financial — it is, if you happen to be an A-credit firm that hasn’t fallen on hard times recently. Given the state of the economy over the past four years, that’s a pretty exclusive club. For the remainder of the middle-market firms — those with strained balance sheets or operating in industries that have fallen out of favor — capital is less abundant.
As Mooney explains it, “Banks are a very active and reliable lender to what I’ll call high-quality credits, [but] when the company is in the midst of a turnaround or a restructuring, or they need capital in order to address some business issues that have come upon them, the banks and others are not as active as they used to be.”
That’s where Crystal Financial steps in. The company, which started lending to the middle market in March 2010, originates, underwrites and manages secured term loans of up to $150 million per transaction with a special focus on firms that are unable to engage capital through more traditional channels.
If the name sounds familiar, that’s probably because it is. The management team — which, in addition to Mooney includes Colin Cross and Michael Pizette — launched the company as Crystal Capital (together with Ed Siskin, who is now at Hilco Financial) in 2006, and rebranded the firm last year to respond to the special needs of a post-recessionary market as well as the introduction of a new investor. The trio enjoys a long history of business success, having partnered on three separate ventures together since the early 1990s. As a team, the three have been responsible for underwriting, closing and managing over $20 billion in new secured debt to 450 borrowers.
Pizette, who serves as senior managing director and chief credit officer at Crystal Financal, says the key to the team’s longevity is its reliance on a unique division of labor model that takes advantage of each member’s “highly different and complementary skill sets.” He explains, “We all have our own specific areas of expertise, so while we are able to consult with each other and have a lot of ‘think-tank time,’ we can rely on each person’s individual abilities.”
In practice, Pizette says, he focuses on underwriting, operations and investment management; Mooney handles the strategic direction of the business; and Cross specializes in originations. “Those are the three key ingredients that are needed for a successful finance company.”
The team’s most noteworthy endeavor, Back Bay Capital, was created in 1998 as a division of BankBoston (subsequently Fleet Bank) and was the first fund to underwrite and syndicate junior lien debt. The company became part of Bank of America in 2005. Soon after, Crystal Capital was launched in response to the enormous market potential that characterized the heady years leading up to financial crisis of 2008 and 2009. Structured as a secured debt fund similar in design to Back Bay Capital, the company offered a diverse group of credit products — including junior lien loans, mezzanine capital, subordinated debt and private equity — that addressed a broad range of capital requirements. The company operated successfully under the Crystal Capital name for three years — building up a portfolio totaling nearly $600 million — when, in 2009, its lead investor announced plans to stop funding illiquid privately placed debt investments.
“At the time they didn’t disclose too much about their rationale,” says Pizette, “[but] we believe that in light of the economic downturn they chose, for the most part, to exit their illiquid debt investments. Historically their core focus has been liquid equity and debt investments.”
According to Pizette, an agreement was reached with the lender whereby Crystal Capital would refrain from making any new debt investments and, in due course, would unwind its portfolio.
Determined to keep the venture afloat, the Crystal management team immediately set about tracking down new capital. They soon found it in billionaire business magnate George Soros.
“In mid- to late-2009, we entered into discussions with Soros Private Equity Partners, which at that time was interested in firms that undertook private illiquid debt investments as a core strategy,” explains Cross, who is Crystal Financial’s senior managing director. By the end of the year, New York-based SPEP — the $3 billion private equity investment arm of Soros Private Funds Management — had committed to taking a majority stake in Crystal; but there would have to be some changes.
“They preferred us not to be a fund,” explains Mooney. “They wanted us organized as a finance company with a primary objective of building enterprise value for its shareholders. So now our mission, over the next eight to ten years, is to grow a specialty finance company focused initially on what we are well known in the market for, which is the underwriting of secured term loans to middle-market companies.”
In light of this shift of focus, the partners decided that it needed a new name — one that would both reflect the market recognition that the company had established since 2006, and signify the re-launch and “fresh start” of the business. Pizette says they determined that Crystal Financial struck just the right balance. “We are not a fund anymore, we are a finance company, so we have as our primary mandate to build enterprise value for our owners and investors,” he says.
Cross adds that the new name also announced a change in the company’s product suite. While the first iteration of Crystal was predominately a provider of second lien loans and first-in last-out (FILO) debt capital, since the relaunch, Crystal Financial now counts first lien, uni-tranche and revolving lines of credit among its line of offerings.
The Crystal Moment
Although Crystal Financial is deftly positioning itself to fill a persistent void in the middle-market lending sector, theirs is not the only company looking to pick up where the banks have failed. Yet Mooney says that many of Crystal’s counterparts in the asset-based lending space are just as reluctant as banks to fund what he calls “off-the-run” deals. This provides the company opportunities to partner with other ABLs, which is one of the ways Crystal Financial originates new business.
“Sometimes we are able to provide loans to borrowers in conjunction with an asset-based lender that the ABL doesn’t want to provide on its own, and usually that means we are lending on assets that they prefer not to lend on,” explains Cross. “It could be real estate or other fixed assets, it could be intangible assets like brand names and intellectual property.”
These are the companies that make up Crystal’s “sweet spot,” and also what keeps the firm relevant in what many lenders are calling one of the most competitive markets in years. “Good quality credits have a lot of competition these days,” says Cross, “but on the other hand companies undergoing a turnaround or that have non-traditional assets to leverage up find it much more difficult, and that’s the market we’re tracking.”
Cross oversees a team of four originators — two at the Boston headquarters and one each in Los Angeles and Atlanta — who he says regularly reach out to banks, ABLs, private equity groups, consultants and investment firms to generate deal flow. More important than the legwork, he says, is the 15-plus years of lending experience and relationships that each of his origination professionals brings to the table. “People want to do business with a firm that they can rely on,” says Mooney. “Ours is a business that is driven by a certain level of trust, and I think that we have established ourselves as a trusted partner on deals, and the people who work with us know that.”
Regarding its lack of a vertical focus, Crystal Financial describes itself as “industry agnostic,” which, according to its principals, means it lends to individual clients, not to industries. It also gives the company the opportunity to focus on sectors, such as printing and automotive, which, although currently out of favor, have what Pizette sees as significant next-generation potential. “There are certain companies that when you start interacting with them you realize that they have a solid well thought out strategic direction for building the next level of intellectual property,” he says. “So we like to deal with these companies that need that capital boost to help get ready for tomorrow.”
Since rebranding last year, Crystal Financial has been doing just that. To date in 2011, the company has closed nine deals — six of them between March and July — including a $30 million term loan to CRS Reprocessing, a Kentucky-based industrial fluids reprocessing firm; a $25 million senior credit facility to Ritz Camera; and a term loan to supermarket chain Piggly Wiggly, which it co-funded with CIT Retail Finance. It has also been aggressively hiring, adding three new professionals over the summer — including a new managing director, Cheryl Carner, who joined from GE Capital Franchise Finance. The company now has 21 employees working out of four offices — Boston, Atlanta, Chicago and Los Angeles. Since its formal relaunch, it has made over $400 million of privately negotiated debt investments to various middle-market companies.
Despite such obvious success, all three partners point out that the ultimate beneficiaries of all their hard work are the dozens of companies struggling to make their way in an unfriendly economic environment — companies that, without the help of lenders like Mooney, Cross and Pizette, could very likely become casualties of an economy still struggling to recover.
“We provide capital that isn’t otherwise available from traditional sources and often our capital makes the difference in the company’s ability to expand, to turnaround or to save their business or parts of their business,” says Mooney. “We all find that very rewarding.”
Christopher Moraff is a freelance writer for ABF Journal and its sister publication the Monitor.