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NewStar to Expand Lower Mid-Market Lending Activities, Forms New Relationships

November 06, 2014, 07:15 AM
Filed Under: Industry News

NewStar Financial, a specialized commercial finance company, GSO Capital Partners, the credit division of Blackstone, and Franklin Square Capital Partners, the largest manager of business development companies, announced that they have formed a strategic relationship to help expand the Company's lower middle- market lending and asset management activities.

The relationship includes an investment of long-term capital from funds managed by Franklin Square Capital Partners (which are sub-advised by GSO) to help fund the Company's growth strategy and expand the scale of its lower middle market lending activity. Under the terms of the investment, funds managed by Franklin Square have committed to purchase $300 million of ten-year subordinated notes and warrants exercisable into 12 million shares of common stock at an exercise price of $12.62. NewStar expects to use the proceeds from the transaction to enhance its ability to originate and lead transactions across all of its business lines and, as a result, significantly increase origination volume and facilitate asset growth. The strategic relationship between the firms is anticipated to contribute materially to NewStar's growth, while extending GSO and Franklin Square's access to the lower middle market. It also allows Franklin Square's funds and GSO to offer their portfolio companies other financing solutions such as equipment leases and asset-based loans from a market leader.

In addition to the investment, the scope of the relationship is expected to result in cross-referral and co-lending opportunities, which are anticipated to provide NewStar with access to new channels of origination, while enabling the Company to provide larger capital commitments and a more complete set of financing options to its clients through its relationship with GSO and Franklin Square. GSO and Franklin Square, separately, may also consider investing additional capital in future lending vehicles managed by NewStar.

"This strategic relationship is nothing short of a game changer for NewStar," said Tim Conway, NewStar's CEO. "I consider both GSO and Franklin Square to be the absolute 'best-in-class' at what they do and we are thrilled to have their backing and Blackstone's support. With $300 million of long-term capital and a significant equity stake in NewStar, I believe that our goals and objectives are perfectly aligned. Our investment styles and credit culture are very compatible and we are already working together effectively to provide larger capital commitments to our clients and open up new channels of origination through the broader GSO and Franklin Square platforms."

Bennett Goodman, Senior Managing Director and Co-Founder of GSO commented on the relationship: "NewStar is widely recognized as a leader in middle market commercial lending. I have known Tim Conway and Peter Schmidt-Fellner, NewStar's CEO and Chief Investment Officer, respectively, for many years. They have managed the firm extremely well and their investment style and credit philosophy are completely consistent with ours." Michael Forman, Chairman and CEO of Franklin Square added, "We believe that our long-term capital commitment, together with the new strategic relationship between NewStar and Franklin Square, will help NewStar accelerate the growth of one of the best lending platforms in the middle market."

NewStar entered into an investment agreement with FS Investment Corporation, FS Investment Corporation II, and FS Investment Corporation III (collectively the "Franklin Square Funds") as of November 4, 2014 to issue up to $300 million of 8.25% subordinated notes due 2024 (the "Subordinated Notes") and warrants exercisable into 12 million shares of common stock at an exercise price of $12.62 (the "Warrants"). The strategic investment is expected to be completed in multiple closings.

The Franklin Square Funds have committed to purchase $200 million of the Subordinated Notes upon the satisfaction of certain customary conditions in an initial closing on or before, December 31, 2014 and an additional $100 million of Subordinated Notes within one year of the initial purchase in one or more tranches of not less than $25 million as requested by the Company. The Warrants will be issued and sold in two tranches. The first tranche of warrants exercisable for approximately 9.5 million shares of NewStar common stock, which represents 19.9% of the Company's outstanding shares immediately prior to the execution of the Investment Agreement, is scheduled to close with the initial issuance of Subordinated Notes. The second tranche of warrants exercisable into approximately 2.5 million shares of NewStar common stock is subject to shareholder approval and is scheduled to close following a special stockholders' meeting at which the Company will request such approval. The Company has entered into separate voting agreements with certain stockholders, which include management, in which they have committed to vote their shares in favor of the issuance of the second tranche of warrants.

To read the full press release, click here.

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