The Unicrunch — Finance gets bigger in Texas

Peter Benson

9 August 2024•5 min read

The Unicrunch is our US private credit newsletter, in which we break down everything from unitranches to ABL lending. Find out more about 9fin for private credit here.

Texas grows

A poll earlier this year found the Cowboys were no longer the most hated NFL team. That partly may be due to a lack of success in recent years (the Chiefs placed first). But the Lone Star State is notching up a few successes in becoming a financial hub — and Jamie Dimon has shown himself to be a fan.

On the horizon is the launch of the Texas Stock Exchange, a national platform for the buying and selling of securities. But more immediately is Texas Capital’s launch of its direct lending business. Developments on both the public and private markets front. That plus the migration of financial professionals to the state means it is becoming a player in the financial services sector.

Texas Capital may not be a household name in middle market lending, but the name will be familiar to 9fin readers as the firm recently led the $1.4bn debt refinancing for prison phone call provider ViaPath Technologies.

And while the headline is another bank entering into private credit, Texas Capital’s foray into the space is a little different than the path forged by many of its banking counterparts. Last year, banks looking to capitalize on the momentum in private credit sought to outsource some of the dealmaking to private credit partners. Texas Capital is instead doing it alone.

The bank has poached Tim Laczkowski from Dallas-based Altacrest Capital, a middle-market lender, to lead the direct lending unit. His experience in middle market stretches back further, with 15 years also spent at Prudential Capital Group, originating and structuring middle-market loans.

The lender has slotted itself squarely into the lower middle market segment, aiming to invest in companies with an EBITDA range between $5m and $50m, with the sweet spot between $10m to $30m. Here the spreads are wider and the covenant packages are tighter compared with the upper end of the middle market — and you are not competing with the handful of well-known, established names in the space.

Texas Capital was not forthcoming on fundraising plans in its release, but being a new platform and trying to get the attention of LPs may be a tricky hurdle these early days. The firm is entering the market at a time that isn’t exactly conducive to organic growth with consolidation on the rise and new entrants are plentiful, all while fundraising continues to be muted. It explains why many banks sought partnerships with firms with proven track records.

The milieu might make it tough. But once they pull in the money there are no shortage of capital-starved companies in Texas and across the US for the lender to invest in.

The Cowboys’ path to success is less apparent.

Middle market health

The tradeoffs of lending into the lower middle market are that while you are getting better returns and stronger protections on individual loans, the companies you are lending to are riskier propositions because they are smaller.

Recent data from KBRA bears this out. Of the companies tracked by the ratings agency as of 2Q 24, 26% of the smaller companies (median EBITDA $10m) saw their EBITDA decline. For larger companies, it was 16% (median EBITDA $93m).

As for why larger companies fared better than smaller companies, it’s a matter of having greater room to maneuver in difficult times. “Larger companies tend to have more ability to make adjustments to cost structures in response to changes in markets or economy,” said Bill Cox, global head of corporate, financial and government ratings at KBRA. “Just by the nature of their size, their percentage changes are likely to be smaller.”

KBRA’s report broadly showed that middle market companies are successfully managing growth strategies. Across over 1,000 borrowers, the ratings agency found median revenue growth of 20% over the last three fiscal periods for the individual companies. Median EBITDA growth over the same period was a handsome 46%.

But it’s not all sunshine and rainbows. Interest coverage ratios are weakening with a quarter of all the companies KBRA assessed are at less than 1x. And times are getting tougher — for over half of companies tracked saw their ICRs weaken during the last period.

Distress is lurking, with private credit LMEs very much on the minds of many lenders (see Pluralsight). This has been clear during BDC earnings season. Of the BDCs 9fin has covered this week, more than half had seen a modest upticks in non-accruals, while others had reported they were in line with the previous quarter.

This week on the 9fin platform

Private credit’s home sweet homebuilders

LP Wrap — Summer splash as fresh cash flows into private credit

Imperial Optical hands control to Golub

Golub Capital — Q3 24 BDC earnings review

Blackstone Secured Lending — Q2 24 BDC earnings review

Foundation Consumer Healthcare looks to slash pricing up to 100bps in refi effort

Blue Owl Capital Corporation — Q2 24 BDC earnings review

MidCap Financial — Q2 24 BDC earnings review

What’s in market

MRI Software — the company is in the market for a repricing of its existing $2.5bn debt and is seeking a $250m incremental loan for additional M&A

Golden State Foods — the company is in advanced stages of a sale process

Porter Airlines — the company is looking to raise CA$250m in preferred equity to bolster its liquidity and pursue growth objectives

Wastequip — the company is looking to refinance its existing syndicated debt facilities in the private credit market

Priority Power — the energy management services company is on the auction block, marketed on $85m LTM EBITDA. Warburg Pincus has expressed interest