|
CapitalSource, Inc. - Commercial Loans - Category Main Page
(800)
370-9431
4445
Willard Avenue, 12th Floor
Chevy Chase, MD 20815
www.capitalsource.com
Sales
$252
million
Business Description
We
are a specialized commercial finance company providing loans to small and
medium-sized businesses. Our goal is to be the lender of choice for
businesses with $5 million to $250 million in annual revenues that require
customized and sophisticated debt financing. We provide a wide range of debt
financing products that we negotiate and structure on a client-specific
basis, through direct interaction with the owners and senior managers of our
clients. We seek to add value to our clients’ businesses by providing
tailored debt financing that meets their specific business needs and
objectives.
Since our inception in September 2000 through December 31, 2003, we have
made 504 loans representing an aggregate of $4.8 billion of committed
capital. As of December 31, 2003, we had $2.4 billion in loans outstanding
and commitments to lend up to an additional $1.3 billion to our clients. As
of December 31, 2003, we had 285 employees.
The financing needs of our clients are often specific to their particular
businesses or their particular situation. We believe we can most
successfully meet these needs and manage risk through industry or sector
focus and flexibility in structuring financings. Because we believe a narrow
focus is important to successfully serve our client base, we originate,
underwrite and manage our loans through three focused lending groups
organized around our areas of expertise. Focusing our efforts in these
specific sectors, industries and markets allows us to rapidly design and
implement lending products that satisfy the special financing needs of our
clients. Our lending groups are:
• Corporate Finance, which generally provides senior and mezzanine loans
principally to businesses backed by private equity sponsors;
• HealthCare Finance, which generally provides asset-based revolving lines
of credit, first mortgage loans, equipment financing and other senior and
mezzanine loans to a broad range of healthcare companies; and
• Structured Finance, which generally provides asset-based lending to
finance companies and commercial real estate owners.
We price our loans based upon the risk profile of our clients. Our loans
generally range in size from $1 million to $50 million, mature in two to
five years, and require monthly interest payments at floating interest
rates. Senior secured asset-based loans comprised approximately 33% of our
portfolio as of December 31, 2003. Senior secured cash flow and first
mortgage loans made up an additional 35% and 28%, respectively, and
mezzanine loans accounted for 4% of our portfolio as of December 31, 2003.
As of December 31, 2003, our geographically diverse client base consisted of
approximately 311 clients with headquarters in 39 states and Washington,
D.C.
Our Lending Groups
The following describes the particular characteristics of our three focused
lending groups: Corporate Finance, HealthCare Finance and Structured
Finance.
Corporate Finance
Our Corporate Finance group provides debt financing to small and
medium-sized businesses typically sponsored by private equity firms, most
often in connection with extraordinary corporate transactions such as
leveraged buyouts. We consider small to medium-sized private equity firms to
be our primary clients and consider the provision of debt financing in
connection with leveraged buyouts with a transaction size of between $15
million and $100 million to be our primary market opportunity.
We finance a wide variety of companies, including:
• business services companies;
• consumer products and brands;
• value-added manufacturers;
• media companies, primarily television and radio broadcasters;
• retailers; and
• healthcare service companies operating in non-reimbursement sectors.
Corporate Finance finances fundamentally sound businesses at a significant
discount to their enterprise value. In particular, we focus on companies
with experienced management teams that have market leadership positions in
attractive niches or where significant barriers to entry or “switching
costs,” that is, the expenses incurred by customers of our borrowers to find
new suppliers/service providers, exist. Leveraging off the asset-based and
structuring capabilities that reside within our company, we can also provide
a variety of highly structured financings. These financings are often used
by our clients to provide added liquidity in a turnaround, satisfy off
balance sheet financing needs to otherwise fund a special situation or
transaction.
In almost all cases, we source our transactions either through private
equity investors who acquire businesses for financial or strategic purposes
or through financial intermediaries such as accounting, law, investment
banking, brokerage, or turnaround consulting firms. We have relationships
with many of the country’s leading private equity sponsors, and we believe
that we have developed a reputation among these firms and other
professionals for our ability to quickly assess a situation and offer a
creative and timely response.
Through our existing relationships and by developing additional strategic
relationships with private equity firms, we believe we will be able to
continue to grow our Corporate Finance loan portfolio. Private equity funds
generally invest significant amounts of equity in their portfolio companies
only after performing significant amounts of due diligence and analysis. In
addition, due to the magnitude of their typical investments, private equity
firms are motivated to manage their investments closely.
We provide cash flow and asset-based financings, generally ranging from $5
million to $50 million, for:
• acquisitions;
• leveraged buyouts;
• consolidations;
• recapitalizations; and
• corporate growth.
Our financing transactions are generally structured as:
• senior secured term debt underwritten to cash flow;
• senior secured asset-based revolving loans; or
• mezzanine debt, typically in the form of junior or senior subordinated
term debt, generally also involving warrants in the client’s equity.
We often provide both senior and mezzanine debt to a single client to
provide all or substantially all the debt financing for a transaction. We
also often provide an asset-based revolver in connection with our senior
term loans. Additionally, we often make small equity investments in our
clients.
HealthCare Finance
Our HealthCare Finance group generally provides accounts receivable-based,
short-term real estate, equipment and other financing to small and
medium-sized businesses in the healthcare market, the largest segment of the
U.S. economy. The healthcare industry is dominated by small to medium-sized
businesses and exhibits rapid growth, consolidation and change.
We believe that there are several distinct drivers of this growth,
including:
• growth in private and public spending on healthcare and a rising
percentage of the U.S. gross domestic product devoted to healthcare;
• governmental and market forces which have put pressure on healthcare
service providers to reduce healthcare delivery costs and increase
efficiency, producing short-term capital needs as providers increasingly are
forced to rely on new technologies to enable their businesses to grow;
• favorable demographic trends, including both the increase in and aging of
the U.S. population;
• growth, consolidation, and restructuring of fragmented sub-markets in
healthcare, including long-term care, hospitals and physician practices; and
• advances in medical technology, which have increased demand for healthcare
services by increasing the number of diseases that can be effectively
treated and by extending the population’s life expectancy.
We have specifically targeted the debt financing needs of the following
healthcare sub-markets:
• skilled nursing providers;
• acute care and long-term acute care hospitals;
• mental health providers; and
• home healthcare providers.
Despite what we perceive as a likelihood of significant opportunities due to
the potential for growth, consolidation and restructurings in these
sub-markets, companies operating in these highly fragmented sub-markets
often have significant financing needs that go unmet by traditional sources.
While some commercial banks and diversified finance companies have divisions
that provide financing for healthcare service providers, these lenders
generally lend only to companies with borrowing needs in excess of $20
million and often require that clients have an extensive operating history.
The clients of our HealthCare Finance group often derive a significant
portion of their revenues from third-party reimbursements, particularly
Medicare and Medicaid. We provide a broad range of asset-based and cash flow
floating-rate financing products in connection with acquisitions,
refinancings and recapitalizations, as well as for general operations.
We primarily finance smaller, growing companies with limited access to
sources of financing. Some of our clients are constrained from obtaining
financing from more traditional sources due to their inadequate equity
capitalization, limited operating history, lack of profitability or because
their financing needs fall below commercial bank size requirements. We
believe that we have the healthcare industry expertise needed to underwrite
smaller healthcare service companies and the specialized systems necessary
for tracking and monitoring healthcare receivables transactions.
Our financing activities are generally structured as:
• senior term loans secured by a first mortgage in the healthcare facility;
• asset-based loans secured by an interest in the client’s assets, including
in most instances accounts receivable; and
• senior secured and mezzanine loans underwritten to cash flow of clients
owning healthcare facilities or providing healthcare services.
As of December 31, 2003, HealthCare Finance had $657 million in loans
outstanding as well as commitments to loan an additional $520 million to 126
existing clients.
Structured Finance
Our Structured Finance group provides debt financing to small and
medium-sized businesses that require complex financing alternatives within
our targeted sectors of lender finance and real estate. Our product
offerings vary depending on which of our target markets we are servicing. In
our lender finance business, we make loans to finance companies. As
collateral for our loans, these finance companies pledge to us their loans
to their customers, which we refer to as receivables. In servicing the
lender finance market, we offer clients senior term loans and revolving
credit facilities. We target:
• specialized commercial lenders such as mortgage companies, leasing
companies and asset-based lenders;
• specialized consumer lenders such as consumer installment lenders and
automobile lenders; and
• resort developers and finance lenders.
We also conduct a mortgage lending practice through Structured Finance. We
make floating-rate term loans secured by various types of real estate,
including office, industrial, hospitality, multi-family and residential
properties. These loans may be structured either as senior loans or as
mezzanine loans typically with terms of two to five years. The borrowers are
usually special purpose entities that have been formed for the purpose of
holding discrete properties by experienced owners and operators of real
property. We generally make loans that do not fit bank or insurance company
lending criteria.
Our senior loans are secured by a first mortgage in the relevant property.
Our mezzanine loans may be secured by a second mortgage on the relevant
property or a direct or indirect pledge of equity in the entity that owns
the property. Our credit philosophy for our real estate finance activities
emphasizes selecting properties that generate stable or increasing cash flow
streams, have strong asset quality, and proven sponsorship with defined
business plans. Our senior loans are often used to fund acquisitions of
properties that the new owner intends to use for a purpose that is different
than what the property is being used for at the time of the purchase. This
repositioning of the property often requires repayment flexibility. To
address this need our mortgage loans may have little or no principal payment
requirements for all or a portion of the loan term. We generally advance the
client an amount up to 90% of the lesser of the appraised value or the
actual cost of the property that secures the loan.
As of December 31, 2003, Structured Finance had $788 million in loans
outstanding as well as commitments to loan an additional $395 million to 118
existing clients.
Loan Products and Service Offerings
The types of loan products and services offered by each of our lending
groups share common characteristics, and we generally underwrite the same
types of loans across our three groups using the same criteria. When
opportunities arise, we may offer a combination of products to a particular
client. This single source approach often allows us to close transactions
faster than our competitors and avoids complicated and time-consuming
intercreditor negotiations. We believe our flexibility in terms of the
variety of our product and service offerings and our willingness to
structure our loans to meet the particular needs of our clients provide us
with a competitive advantage over other lenders.
Senior Secured Asset-Based Loans
Asset-based loans are collateralized by specified assets of the client,
generally the client’s accounts receivable and/or inventory. A loan is a
“senior” loan when we have a first priority lien in the collateral securing
the loan. Consequently, in the event of a liquidation of the client, we
would generally be entitled to the proceeds of the liquidation before the
client’s other creditors. These loans, which are generally between $1
million and $50 million, usually have a term of two to five years. We
generally will advance a client, on a revolving basis, between 80% and 90%
of the value of the client’s eligible receivables or between 30% and 70% of
a client’s eligible inventory.
A client’s eligible receivables are those receivables that, in our
assessment, will be collectible by the client within a specified period of
time. In determining which of a client’s receivables are eligible
receivables, we assess the client’s total receivables and make an adjustment
for that portion of the total receivables we believe may be uncollectible.
For instance, if a potential client has $20 million of accounts receivable
on its balance sheet and we believe, based upon our due diligence, that 10%
of these receivables may ultimately be uncollectible, in our view, the
client has $18 million of eligible receivables to serve as collateral for
our loan. We will consider lending the client up to 90% of that amount.
A client’s eligible inventory is that portion of the client’s total
inventory that we believe the client will be able to liquidate within a
specified period of time. In determining which portion of a client’s
inventory is eligible inventory, we assess the client’s total inventory and
make a judgment as to the portion of the inventory that the client may not
be able to sell. For instance, if a potential client has $20 million in
inventory on hand and we believe that, based on our due diligence, the
client may ultimately be unable to sell $2 million of that inventory, in our
view, the client has $18 million of eligible inventory to serve as security
for our loan. We will consider lending the client up to 70% of that amount.
We believe that by using established advance rates against eligible
collateral we guard against the deterioration of a client’s performance.
Generally, we establish these advance rates assuming liquidation of the
client’s assets, which is designed to assure repayment of our loan
regardless of the client’s business prospects. As a result, in addition to
our standard underwriting procedures performed on every client, we conduct
extensive due diligence to develop an estimate of a prospective client’s
eligible receivables or inventory to establish the correct advance rate when
underwriting asset-based loans.
We perform industry-specific procedures when assessing the eligibility of
receivables in originating asset-based loans in our Structured Finance and
HealthCare Finance groups. In underwriting the eligible receivables for the
Structured Finance loans, we closely analyze the receivables portfolios
against which we lend. This analysis includes scrutiny of the following
characteristics:
• performance of the receivables, including an extensive analysis of a
discrete pool of receivables over a specified period of time;
• seasoning, or the length of time that the receivables have been
outstanding;
• adherence by the party that owes the receivable to our client to the terms
of the contract that forms the basis for the receivable;
• credit score, such as FICO or FAIR, if applicable, of the parties that owe
the receivables; and
• diversification of the client’s receivables portfolio that serves as
collateral for our loan with a focus on:
• average receivables size;
• geographic distribution of the receivables;
• maturities of the receivables; and
• weighted average interest rate of the portfolio.
In our HealthCare Finance group, we conduct targeted examinations of the
client’s accounts receivables due from third-party payors. Most of these
receivables are payment obligations of federal and state Medicare and
Medicaid programs and other government financed programs, commercial
insurance companies, health maintenance organizations, and other managed
healthcare concerns. This evaluation typically includes:
• a review of historical collections by type of third-party payor;
• a review of remittance advice and information relating to claim denials;
• a review of claims files;
• an analysis of billing and collections staff and procedures; and
• a comparison of net revenues to historical collections.
We mitigate the risk of our senior asset-based loans by placing a first
priority lien, typically on all of the client’s assets, not just the
receivables and/or inventory deemed eligible for purposes of determining the
borrowing base of the loan. We also generally cross-collateralize and
cross-default our asset-based revolving credit facilities and term loans
made to the same client. An asset-based revolving credit facility is a loan
in which the client may borrow, repay and then reborrow money based on the
value of its eligible collateral. Unlike a revolving loan, once the client
repays any portion of its outstanding borrowings under a term loan, that
portion is not available for reborrowing. If a client is, as many of our
clients are, a borrower under both a senior term loan and an asset-based
revolving credit facility, and were to default on its obligations under
either loan, we could use the collateral pledged as security for either loan
to satisfy any of the defaulted obligations.
Notwithstanding these security arrangements, we assess the viability of the
client’s business to determine whether the client can sustain its business
operations for the duration of the loan. For further security in our
collection efforts, we typically require that a client’s cash receipts be
deposited in a lockbox account that remains under our control for as long as
any portion of the loan is outstanding. Funds from the lockbox account are
generally automatically swept into our account on a periodic basis to
satisfy the client’s loan obligations to us. In some instances, as
additional security on our loans, we will also require a guarantee from, or
enter into a capital call agreement with, one or more of a client’s equity
sponsors. A typical guarantee requires the equity sponsor to satisfy all or
a portion of the client’s obligations to us if the client defaults on its
obligations. Under a typical capital call arrangement, we have the ability
to require a client’s equity sponsor to provide additional funds to the
client so that the client may satisfy its debt to us. In addition, in most
of our financings to other lenders we also engage independent third parties
as collateral custodians to hold and maintain the documentation representing
our collateral.
Our asset-based loans typically contain financial covenants that require the
client to, among other things, maintain a minimum net worth and fixed charge
coverage throughout the life of the loan.
Senior Secured Cash Flow Loans
We make loans based on our assessment of a client’s ability to generate cash
flows sufficient to repay the loan and to maintain or increase its
enterprise value during the term of the loan. These types of loans are
referred to as cash flow loans. Our senior cash flow term loans generally
are secured by a security interest in all or substantially all of a client’s
current and fixed assets. In some cases, the equity owners of a client
pledge their stock in the client to us. These loans generally range in size
from $1 million to $40 million and have a term of three to five years.
In determining whether we believe a client will be able to generate
sufficient cash flow to repay the loan, we consider a variety of factors
including the client’s:
• historical and projected profitability;
• balance sheet strength and liquidity;
• equity sponsorship;
• market position;
• management strength and experience;
• proprietary nature of the business, if applicable;
• ability to withstand competitive challenges; and
• relationships with clients and suppliers.
Clients who borrow under our cash flow loans are typically subject to a
number of financial covenants for as long as the loan is outstanding. These
covenants generally require that the client maintain a:
• specified maximum ratio of senior debt to cash flow;
• specified maximum ratio of debt to equity;
• minimum level of earnings before interest, taxes, depreciation and
amortization expenses; and
• minimum fixed charge coverage.
Clients are also typically subject to limitations on their ability to make
capital expenditures or distributions or to enter into capitalized leases.
Mortgage Loans
We make floating rate term loans secured by first mortgages on the
facilities of the respective client. These loans generally range in size
from $1 million to $40 million and have a term of two to five years. Our
clients to which we make mortgage loans include:
• experienced owners and operators of hospitals, senior housing and skilled
nursing facilities located in the United States;
• experienced owners and operators of office, industrial, hospitality,
multi-family and residential properties;
• resort developers; and
• companies backed by private equity firms that frequently take out
mortgages in connection with buyout transactions.
Prior to extending a mortgage loan to a particular client, we perform
extensive due diligence focusing on:
• the historic and projected cash flow of the mortgaged property;
• the condition of the property;
• the market positioning of the client;
• licensing and environmental issues related to the property and the client;
• the client’s management; and
• for HealthCare Finance clients, its operational expertise, its regulatory
and clinical compliance, its reimbursement practices and its reputation in
the local healthcare market.
Our mortgage loans contain typical financial covenants that require the
client to, among other things, demonstrate satisfactory debt service
coverage. The client is also typically limited in its ability to make
distributions to its equity owners while the loan is outstanding. Because we
underwrite our mortgage loans based on the value and cash flow of the
underlying real estate rather than as an operating business,
CapitalAnalytics generally does not perform the due diligence or
underwriting procedures relating to these proposed loans. Our investment
officers, however, perform full due diligence and valuation procedures for
our mortgage loans.
Term B, Second Lien and Mezzanine Lending
We frequently make Term B, second lien and mezzanine loans to clients that
also have outstanding senior loans. A Term B loan is a loan that shares a
first priority lien in the client’s collateral with the lenders on the
client’s senior loan but that comes after a senior secured loan in order of
payment preference upon a borrower’s liquidation and accordingly generally
involves greater risk of loss than a senior secured loan. A second lien loan
is a loan that has a lien on the client’s collateral that is junior in order
of priority and also comes after the senior loans in order of payment. We
also make mezzanine loans that may be either cash flow or real estate based
loans. A mezzanine loan is a loan that does not share in the same collateral
package as the client’s senior loans, may have no security interest in any
of the client’s assets and comes after a senior secured loan in order of
payment preference. A mezzanine loan generally involves greater risk of loss
than a senior loan. We typically permit our Term B, second lien and
mezzanine clients to maintain a higher ratio of debt to cash flow than we
permit with respect to our senior secured, first lien loans. When we make a
Term B, second lien or a mezzanine loan, we typically enter into an
intercreditor agreement with the senior lenders of the client. These
agreements limit our ability to exercise some of the rights and remedies to
which we are entitled under the terms of our loan agreements. For example,
typically we may not receive payments of principal on a mezzanine loan until
the senior loan is paid in full and may not receive interest payments on the
loan if the client is in default under the terms of the senior loan. In many
instances, we are prohibited from foreclosing on a Term B, second lien or
mezzanine loan until the senior loan is paid in full. A typical
intercreditor agreement also requires that any amounts that we realize as a
result of our collection efforts or in connection with a bankruptcy or
insolvency proceeding involving the client be turned over to the senior
lender until the senior lender has realized the full value of its own
claims.
HUD Mortgage Originations
As a strategic supplement to our traditional healthcare lending business, we
also act as an agent for the United States Department of Housing and Urban
Development, or HUD, for the origination and servicing of federally insured
mortgage loans to healthcare providers. Because we are a fully approved
Federal Housing Authority Title II mortgagee, we have the ability to
originate, underwrite, fund and service mortgage loans insured by the FHA.
FHA is a branch of HUD which works through approved lending institutions to
provide federal mortgage and loan insurance for housing and healthcare
facilities.
In addition to being an FHA approved lender, we are also an approved
multifamily and healthcare MAP lender. MAP is a national “fast-track”
processing system for the FHA Multifamily (and healthcare) mortgage
insurance program. Being a MAP lender gives us more control over the loan
application process, allowing us to prepare most of the exhibits required
for an application for mortgage insurance and make a recommendation to HUD
based upon the underwriting and conclusions of our credit committee. In
turn, HUD reviews the package and makes the final credit decision.
The HUD approval process may take up to nine months or more from application
to approval. In many cases, we make a bridge loan to our clients providing
them with needed liquidity prior to receipt of the HUD approval.
As permitted by applicable federal regulations, we may receive fees for our
services in originating or placing these federally insured loans. We sell
the servicing rights to a third party for a fee. We may from time to time
sell our interests in the federally insured loans we originate to third
parties where we can do so at a premium to the principal amount of the loan
originated.
Since we began offering our HUD mortgage origination services in March 2002,
we have arranged for the commitment and closing of 13 loans insured by the
FHA. These products have generated $5.6 million in revenue through December
31, 2003.
Warrants and Equity Co-Investments
In connection with some of our loans, we obtain, without making interest
rate or other lending concessions, warrants to purchase equity in our
borrowers. The warrants we obtain are generally exercisable at a nominal
price, typically $0.01 per share. We obtain these warrants as a potential
means of enhancing our yield from the related loans, and we expect to
continue to seek warrants in connection with our loans where possible.
We may also purchase equity in a borrower at the same time and on
substantially the same terms as of one of our private equity sponsor
clients. These equity purchases generally range from $250,000 to $2.0
million in any given client. As is the case with the warrants we obtain with
our loans, we do not agree to any rate or lending concessions in the loans
we make to these borrowers. Most often, these investments are acquired
through our Corporate Finance group, which generates opportunities as a
result of its relationships with private equity firms. In the course of
evaluating a prospective client’s creditworthiness as a borrower, we also
evaluate its prospects for growth. We make our equity investments in those
cases where we conclude, based on the results of our diligence, that there
is a likelihood we will receive a significant return on our equity
investment. Our management expects that these equity co-investments will
continue to be only an ancillary component of our business.
Our loans provide for a contractual variable interest rate from
approximately 0% to 16.0% above the prime rate. To mitigate the risk of
declining yields if interest rates fall, we seek to include an interest rate
floor in our loans whenever possible. Whether we are able to include an
interest rate floor in the pricing of a particular loan is determined by a
combination of factors, including the potential client’s need for capital
and the degree of competition we face in the origination of loans of the
proposed type. Where our competition to originate loans is high, such as in
our Corporate Finance group, the inclusion of an interest rate floor often
depends on the client’s desire to guard against rising interest rates by
accepting the interest rate floor in return for a narrower margin over the
prime rate than we would otherwise offer. As of December 31, 2003, 74% of
the aggregate outstanding balance of our loans included such a minimum
interest rate.
Our loans generally have stated maturities at origination that range from
two to five years. As of December 31, 2003, the weighted average maturity of
our entire loan portfolio was approximately 4 years. As of December 31,
2003, the weighted average life of our entire loan portfolio was
approximately 2.4 years. Our clients typically pay us an origination fee
based on a percentage of the commitment amount and typically are required to
pay a prepayment penalty for at least the first two years following
origination. They also often pay us a fee based on any undrawn commitments
as well as a collateral management fee in the case of our asset-based
revolving loans
Origination
Our loan origination process begins with our development officers who are
charged with identifying, contacting and screening our prospective clients.
Our development officers spend a significant portion of their time meeting
face-to-face with key decision makers and deal referral sources such as
private equity investors, business brokers, attorneys, investment bankers
and executives within our target industries.
To support our development officers, we actively market our business in an
effort to build awareness of the CapitalSource brand and to generate
potential financing opportunities. We have developed an aggressive marketing
strategy focusing on enhancing the awareness of prospective clients of the
CapitalSource brand. Components of this strategy include:
• development of relationships with private equity firms that we hope will
result in the positioning of CapitalSource as the preferred source of
financing for transactions among those firms and their portfolio companies;
• traditional marketing and brand development activities such as:
• selective advertising in trade publications within our targeted sectors,
industries and markets;
• participation in regional and national conferences attended by prospective
clients and potential referral sources;
• targeted direct mail efforts;
• telemarketing; and
• extensive cross-selling efforts where we market our one-stop shop of
lending products to meet emerging financial needs of our clients as they
arise.
Once a prospect is identified, the development officer or an investment
officer enters basic transaction data into our proprietary transaction
management database, DealTracker. The development officer then works closely
with one of our investment officers in the relevant lending group to
describe the prospective client’s situation and financing needs. Based on
these discussions the investment officer makes a determination whether to
proceed with the prospect.
If the investment officer determines that the potential transaction meets
our initial credit standards, he or she prepares a term sheet. The term
sheet is reviewed and approved by the managing director for the relevant
lending group. In cases involving loans underwritten based on cash flow
projections, the credit committee also generally reviews the proposed term
sheet. The term sheet is linked to DealTracker and electronically
distributed to the professional staff involved in the origination, credit
and legal functions of our business. This distribution provides an
opportunity for other investment officers and staff to review the proposed
transaction and, as appropriate, provide comments and suggestions.
Once the term sheet receives the required internal approvals, the term sheet
is sent to the prospective client. The investment officer and the
prospective client then negotiate the principal terms of the financing and,
if the terms are agreed to, execute the term sheet.
Underwriting
Once the term sheet has been executed, we typically require that the
prospective client remit a good faith deposit to cover a portion of our
direct out-of-pocket expenses as well as the due diligence and other
expenses that we incur in connection with the proposed transaction,
including outside and internal legal and auditing expenses and any
third-party expenses. Once we receive this deposit, the responsible
investment officer prepares an initial client memorandum briefly summarizing
the terms of the proposed transaction and its associated risks. This
memorandum is linked to DealTracker and distributed to our entire
professional staff involved in the organization, credit and legal functions
of our business. The relevant lending group also discusses the proposed
transaction at its weekly professional staff meeting.
Following preparation of this initial client memorandum, for all
transactions other than mortgage loans, the investment officer engages
CapitalAnalytics, our wholly owned due diligence and field examination
subsidiary, to perform comprehensive due diligence and underwriting
procedures relating to the proposed transaction. The investment officer
concurrently conducts detailed due diligence focusing on the prospect’s
industry, business and financial condition and its management and
sponsorship, if any. The investment officer works with our investment
analysts in the applicable lending group to prepare a detailed memorandum
describing and analyzing the proposed transaction. Once the investment
officer’s memorandum is approved by the managing director of the applicable
lending group, this memorandum and a memorandum prepared by the underwriting
officer are circulated to members of the credit committee as well as other
key individuals, and are also linked to DealTracker.
CapitalAnalytics
Because of the primary emphasis we place on credit and risk analysis, we
have incorporated the underwriting, diligence and client examination
functions into our lending process. We believe that the in-house examination
and due diligence functions that CapitalAnalytics performs enable us to
maintain a high level of quality control over these functions while
delivering faster service than our competitors. The expertise of the
professionals at CapitalAnalytics also facilitates our comprehensive efforts
in the ongoing management of our portfolio, as discussed below.
CapitalAnalytics is principally staffed by underwriting officers possessing
significant levels of credit approval experience with banks, finance
companies, accounting and/or audit firms. Within CapitalAnalytics, each of
the underwriting officers and analysts is focused on a particular lending
group. The underwriting officers work with our loan analysts and examiners
to conduct a detailed, comprehensive accounting examination of prospective
clients as part of the underwriting process.
Unlike our development and investment officers who report to the managing
directors of our lending groups, the CapitalAnalytics professionals report
to our Chief Credit Officer. The Chief Credit Officer supervises, evaluates
and determines the compensation of each CapitalAnalytics employee. All
compensation decisions are based on factors such as the employee’s level of
experience and position as well as a qualitative assessment of his work
product. Quantitative factors such as the number and size of loans
ultimately approved are not considered in determining compensation.
Housing this important underwriting function in CapitalAnalytics is designed
to ensure that the underwriting and credit analysis of each transaction is
performed by professionals who have not had a role in identifying the
prospect or negotiating the terms of the proposed loan. Because our
CapitalAnalytics professionals report to the Chief Credit Officer rather
than the managing directors of our lending groups, we believe that
CapitalAnalytics is able to focus exclusively on ensuring the
creditworthiness of our borrowers and our “credit first” philosophy. We
believe that the compensation process for our CapitalAnalytics personnel
further reinforces this orientation.
The costs of the services provided by CapitalAnalytics are ultimately
charged to the client. Services related to underwriting and credit analysis
on each loan origination are capitalized and amortized as interest income
over the life of the loan. Services relating to recurring diligence on
existing loans and services on terminated loans are taken into income as the
services are provided or when the loan is terminated, respectively. For the
years ended December 31, 2003, 2002 and 2001, CapitalAnalytics charged to
borrowers $6.0 million, $2.7 million and $0.8 million, respectively.
To apply consistent underwriting standards, CapitalAnalytics uses
sector-specific due diligence methodologies that have been developed by our
Chief Credit Officer and his staff. These procedures include detailed
examinations and customized analyses by our underwriting teams of the
following key factors of each client:
• the collateral securing the loan;
• the client’s historical and projected financial performance;
• its management, including thorough detailed background checks that
occasionally involve private investigators;
• its operations and information systems;
• its accounting policies;
• its business model;
• fraud risk;
• its human resources;
• the legal and regulatory framework encompassing the prospective client’s
operations; and
• the financial performance of the prospective client’s industry.
As part of the evaluation of a proposed loan, the underwriting team prepares
a comprehensive memorandum for presentation to the credit committee. The
typical underwriting memorandum prepared by CapitalAnalytics for a
prospective transaction generally consists of:
• a description of the business;
• an evaluation of risks specific to the business;
• a detailed analysis of the client’s historical and projected financial
performance;
• an in-depth balance sheet and collateral analysis;
• a client-specific testing and analysis;
• the results of a number of other detailed examination procedures;
• a description of the client’s capital structure; and
• a description of the investment risk and return characteristics.
When the underwriting memorandum is complete, it is provided to the director
of credit of the relevant lending group for review. After any requested
revisions are made, the lead underwriting officer submits the underwriting
memorandum to the credit committee members and links it to DealTracker at
the same time as the investment officer distributes his memorandum.
Approval
In addition to the approval of the managing director for the relevant
lending group, the unanimous approval of our credit committee is required
before we make a loan. The four members of our credit committee are our
Chief Executive Officer, our President, our Chief Credit Officer and our
Chief Legal Officer. The credit committee generally meets weekly and more
frequently on an as-needed basis. Prior to the credit committee meetings,
our members review the separate memoranda prepared by the investment officer
and CapitalAnalytics. At the meeting, the investment officer and lead
underwriting officer for each transaction under consideration present their
findings and recommendations to the committee members. The committee members
then have the opportunity to discuss the transaction with the presenting
officers and the managing director of the relevant lending group. Following
the discussion, the committee votes on whether to approve the transaction.
If approved, the legal documentation process begins. Many of our loans are
documented and closed by our 18-person in-house legal team. Other loans are
outsourced to outside counsel who document and close loans under the
supervision of our in-house legal department. The legal costs we incur in
documenting and closing our loan transactions, whether attributable to
in-house or outside legal counsel, are charged to our clients.
Ticker
CSE
Business Loans Providers in the Directory
Allied Capital
Bank of America
CapitalSource
CIT Group
GE Capital
Silicon Valley Bank
U.S. Bank
Wachovia
Wells Fargo
|
|
