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NewStar Closes on $200M Initial Investment As Part Of Strategic Relationship With Blackstone's GSO Capital And Franklin Square

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NewStar Financial Inc. (Nasdaq: NEWS) ("NewStar" or the "Company"), a specialized commercial finance company, GSO Capital Partners ("GSO"), the credit division of the Blackstone Group (NYSE: BX), and Franklin Square Capital Partners, the largest manager of business development companies, announced today that they have completed the initial closing of an investment of long-term capital as part of a broader strategic relationship to help expand the Company's lower middle market lending and asset management activities.

NewStar previously announced that it had entered into an investment agreement (the "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 $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").

In an initial closing on December 4, 2014, the Franklin Square Funds purchased $200 million of 10-year Subordinated Notes and the first tranche of Warrants exercisable for 9.5 million shares of NewStar common stock at an exercise price of $12.62, which reflected a premium to the Company's prior day closing stock price of $10.88. The Franklin Square Funds have also committed to purchase 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 each as requested by the Company. A second tranche of Warrants exercisable for 2.5 million shares of NewStar common stock is subject to stockholder 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.

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 asset growth. The strategic relationship between the firms is already contributing materially to NewStar's growth, while extending GSO and Franklin Square's access to the lower middle market.

The Subordinated Notes rank junior to the Company's existing and future senior debt. They bear interest at 8.25% payable semi-annually and include a Payment-in-Kind ("PIK-Toggle") feature that allows the Company, at its option, to elect to have interest accrued at a rate of 8.75% added to the principal of the Subordinated Notes instead of paying it in cash. The Subordinated Notes have a ten year term and will mature on December 4, 2024. They are callable during the first three years with payment of a make-whole premium. The prepayment premium decreases to 103% and 101% after the third and fourth anniversaries of the closing, respectively. They are callable at par after year five. Events of default under the Subordinated Notes include failure to pay interest or principal when due subject to applicable grace periods, material uncured breaches of the terms of the Subordinates Notes and bankruptcy/insolvency events.

The Warrants will expire in ten years and may be exercised in whole, or in part, by payment in cash of the aggregate exercise price or pursuant to net share settlement provisions. The Warrants also include customary anti-dilution provisions.

In addition to the investment, the relationship has already begun to generate cross-referral and co-lending opportunities, which are providing 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. GSO and Franklin Square, separately, are also considering investments of additional capital in lending vehicles managed by NewStar, which is anticipated to drive growth in assets under management.

"Our relationship with GSO and Franklin Square is a powerful partnership that is already exceeding our expectations," said Tim Conway, NewStar's CEO. "Our investment styles and credit culture are very compatible and we are working together effectively to provide larger capital commitments to our clients and open up new channels of origination through the broader Blackstone, GSO and Franklin Square platforms. As a result, it is already contributing materially to our loan origination volume, asset yields and asset management activities."

Posted-In: Earnings News

 

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