Broadly syndicated loans (BSLs) are the most common form of leveraged bank loans — i.e., loans supported by cash flows to finance mergers, acquisitions, and recapitalizations. The most prominent investors in bank loans are collateralized loan obligations (CLOs), which control approximately 65 percent of the BSL market share.
Saratoga Investment Corp. (Saratoga) is a publicly traded (NYSE: SAR) business development company (BDC) providing customized financing solutions, typically for middle market companies located in the United States (with our CLO being the exception). Our investment professionals have a combined 80+ years of experience investing over $15 billion of capital across broadly syndicated loans, middle market loans, and leveraged buyouts. Saratoga owns the equity and manages a CLO, which is a $500 million portfolio of approximately 250 BSLs.
The CLO considers loans marketed by large banks, and after doing its own due diligence decides whether or not to purchase the loan. The CLO managed by Saratoga maintains a defensive core investment thesis with the intention to hold the loans to maturity. Saratoga has been nominated multiple times for best performing boutique US CLO manager by Creditflux. A disciplined credit approach is the primary driver for the consistently strong performance.
Characteristics of CLOs:
- Investment vehicle based on pooled debt
- Managers buy/sell loans — usually business loans
- Typical loan is 5-7 years, and secured by borrower’s assets
- Lender assumes most default risk
- Investors see above-average returns
We provide broadly syndicated loans to businesses in following industries:
- Financial Services
- Business Services
- Healthcare
- Technology
- Media & Telecommunications
- Other various defensive industries
We review many quantitative metrics when we consider taking on a broadly syndicated loan with a focus on loan sizes greater than $250 million and leverage below 4x.
From a qualitative standpoint, we are seeking companies with seasoned management teams, flexible cost structures and recurring revenue. We also favor those that dominate a niche market and possess high barriers to competitive entry, while featuring strong free cash flow and high return on assets.
For more information about broadly syndicated loans, contact Mike Didier.
The importance of Broadly Syndicated Loans
The companies that require a BSL, usually as a result of a leveraged buyout or a public company recapitalization, seek loans from large banks. As mentioned, these banks then market the loan to institutional investors such as Saratoga’s corporate credit team, as well as mutual funds, alternative asset managers and hedge funds.
About 80 percent of broadly syndicated loans, including those issued by Saratoga, are covenant-lite — i.e., they do not feature financial covenants requiring a borrower to show a minimum annual cash flow in comparison to the amount borrowed, as has typically been the case in the past. That is reflective of a market that has become more amenable to the borrower in recent years.
Whereas marked decreases in cash flow would have previously led to a default — as well as the possibility that a lender would take control of a company — that can only result from a missed payment under the terms of a covenant-lite loan. That gives the borrower a chance to recover from an economic downturn, something particularly valuable during the 2008-09 recession and the slump resulting from the coronavirus pandemic.
The lender, meanwhile, avoids being forced to take control of any given enterprise — something that is of no interest to a firm like Saratoga — and avoids the loss that might result from a hurried sell-off in the wake of a default.
Looking to invest in a CLO or to learn more about Saratoga? Contact Mike Didier.