For a short time, NXT was also engaged in equipment finance, but
that segment was not growing as quickly, so Radway and his team
decided it was better to reallocate that capital.
Wider Market for Non-Bank Lenders
“In terms of the opportunities, clearly, as a non-bank lender we have
been the beneficiary of the regulatory environment that banks have
been forced to operate in for the better part of the last eight to nine
years. It has created a much wider market seam for non-bank lenders,
particularly in leveraged finance,” Radway says.
“Institutional investors have become very important participants
in what is generally referred to today as private debt, but most of that
activity is focused on leveraged lending,” Radway says. “So there has
been a very significant shift away from deposit-funded bank balance
sheets to institutionally funded vehicles such as commingled loan
funds and SMAs through which corporate and public pension plans,
insurance companies, sovereign wealth funds and endowments have
become significant holders of middle market loans.”
Radway says investors, rather than deposit-funded banks, have
fundamentally changed today’s loan funding process. Like others in
the industry, Radway sees a point at which there could be too much
capital chasing too few opportunities, but he doesn’t think the market
has reached the saturation point yet.
Radway also notes that we’re in the eighth or ninth year of the
current cycle and haven’t had a serious downturn since 2009.
“We are seeing signs that discipline from a credit point of view, in
particular, is eroding, more so than pricing discipline. Overall, credit
standards are slipping with some players being overly aggressive.
I think it’s a problem driven both by the fact that we haven’t had a
downturn in so long and because we’ve had a lot of new investors and
platforms enter the space. You need to be very thoughtful around how
you manage that because you just can’t pick up your marbles and go
home. You have to participate, and you have to be smart about it.”
Being smart about it means realizing that what goes up will very
likely come down.
“We see a lot of folks doing deep unitranche transactions in the
market today against cash flow or company characteristics that we
don’t think are as predictable as that leverage level would suggest,”
Radway says. “So we are staying focused higher up in the capital structure, maintaining discipline around our credit boxes and not really
succumbing to the temptation to believe things will always be good.”
“Because,” he adds philosophically, “they won’t.” abfj
NADINE BONNER is editor of ABF Journal.
A Stellar Team
Indirectly, the mortgage crisis also hindered NXT’s progress. It took
18 months to raise the bank funding needed to get off the ground
and for Wells Fargo to step up as NXT’s lender with a $300 million
commitment. Since 2010, NXT has grown to more than $10 billion in
committed capital. Based in Chicago — with offices in Atlanta, Dallas,
Los Angeles, Nashville, New York and Phoenix — today, NX T provides
leveraged loans to sponsor-owned middle market companies as well as
commercial real estate first mortgage loans.
After working at some of the largest companies in the finance
world, Radway believes a smaller, privately-held organization offers
better potential for “smart” growth. It also allowed him to put together
a team he is very proud of.
“My senior team members all spent time at Heller, Merrill Lynch
Capital and now at NX T Capital. We go back as a team some 20 years
or more. We have about 125 employees here at NXT, and over half are
ex-Merrill Lynch Capital or former Heller Financial colleagues.”
But although the faces are familiar, Radway says operating without
the heft of a big organization behind you creates some differences.
“As a lender we, of course, have to create the assets that generate
the returns that we need. But at the same time, unlike being part of a
large corporate organization like Merrill Lynch or Heller Financial, we
also have to spend as much time addressing the right side, the liability
side, of our balance sheet,” Radway explains.
“We are very focused on asset/liability management and raising
capital for our asset management activity on a recurring basis. While
loan origination, underwriting and account management are all
critical success factors, we spend a lot of time on the financing side
both on and off the balance sheet. We’ve now issued a series of CLOs,
and we’ve expanded our bank group significantly — I think we have
20 or so banks that we borrow money from today. Over the years,
we have dramatically expanded our access to capital because, as
everyone knows, capital is the lifeblood of any finance company. I
would say that’s probably the biggest difference. We are managing
every aspect of the business, which is quite different from our experience at Merrill Lynch.”
Known for Dependability
NX T is a mainstream provider of middle market senior leveraged loans
and does about $3.5 billion of new business volume per year. It has a
team of 16 senior staff members who call on roughly 250 private equity
sponsors to originate transactions for its leveraged lending business.
“We have a very strong flow of opportunities because of these
relationships,” Radway says. “I think we are known for a high degree
of dependability and well established deal execution capabilities. Our
hold size capacity is also very meaningful at up to $125 million per
borrower, made possible by our balance sheet and the nine active asset
management programs from which we are currently deploying capital.
Between very strong direct origination capabilities, well established
and growing funding capacity and good day-in and day-out deal
execution, I think we’ve become one of the main players in the segment
of the market we focus on. We call the business Corporate Finance but,
again, it is sponsor-focused middle market leveraged lending.”
NXT also has a thriving real estate business that provides acquisi-
tion financing for middle market-oriented commercial real estate trans-
actions, including multi-family, industrial, office, hotels and mixed-use
properties. Its capabilities often come into play when the buyer of a
property needs a quick response to close on a transaction and is seeking
short-term — typically three- to four-year financing — for the asset
before either selling or refinancing it. According to Radway, NXT does
roughly $600 million to $700 million annually in this business segment.
“We see a lot of folks doing deep unitranche transactions in the market today against cash flow or company
characteristics that we don’t think are as predictable as that
leverage level would suggest. So we are staying focused
higher up in the capital structure, maintaining discipline
around our credit boxes and not really succumbing to the
temptation to believe things will always be good.”
— Robert Radway