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More gain, but more pain: Non-sponsored originators slog a long way to pay day

Posted on November 21, 2019

WhiteHorse Finance reported an average yield of 11% in the third quarter, a strong level for an 80% first-lien portfolio — albeit down from 11.3% in 2Q19 prior to fed rate cuts. The BDC plays in the lower middle market, but also is one of few that sources a significant amount of deal flow from non-sponsored issuers.

Higher yields are one benefit in this segment —market players say spreads generally start at L+650 and go from there— and so are tighter credit structures. Founder or family-owned companies typically don’t have the market savvy of private equity firms that can sling through multiple deals a month.

Another plus: Non-sponsored mandates are less competitive (even the lower middle market is seeing lenders jockey for on-the-run sponsor business), but that’s because there are a litany of headaches that come with the territory. In fact, many lenders steer clear entirely.

Sourcing and due diligence are among the many hurdles. Underwriting can take as long as…

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Direct Lending Deals is the go-to publication for the direct lending market, an area of leveraged finance that has evolved into its own $1 trillion asset class.