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Evercore believed in Bollinger as a stable, profitable business worthy of investment -- and so did Madison Capital. In February, MCF committed to a $172 million financing package comprising $131 million of senior debt, including a $20 million acquisition line of credit and $41 million in second-lien debt, with AEA Investors LLC's mezzanine group participating. "They did it in a terrible market, and they delivered 100% on what they had committed to, unlike other banks who have tried to wriggle out of their commitments," says James Matthews, senior managing director and co-head of Evercore's private equity business. It's business as usual for Madison Capital. Since inception, Madison has built a reputation for reliability, particularly in tough times. In the past nine months, as commercial banks and other lenders pulled back, even on midsized deals, Madison's star has risen among anxious buyout executives. "Traditional debt providers have been extremely difficult to work with because they've had various challenges and struggles themselves," says William Winterer, managing partner of Boston's Parthenon Capital LLC, which has tapped MCF several times. This has resulted in inconsistencies in approaches to the market, he says, and limited the ability to provide commercially attractive financing. "Madison has been able to differentiate itself by being a very consistent, thoughtful and reliable financing partner for sponsors," he says. MCF got its start in an earlier period of uncertainty, 2001, when markets were also in disarray. The startup seized opportunities to get in front of LBO sponsors in dire need of leveraged finance, which the banks were wary of providing. "People quickly knew who we were," says Trevor Clark, an MCF senior managing director. A group of six leveraged finance specialists with a shared history and a common interest in serving the middle market founded the firm. Christopher Williams, Craig Lacy, Hugh Wade and Clark all had worked at Continental Bank, then at Bank of America Corp., after it acquired Continental in 1994. Thomas Kimmeck hailed from General Electric Capital Corp., as did Clark, who had been with Antares Capital Corp. before its purchase by GE. A sixth founder, Terry Capsay, has since retired and Devon Russell, a Banc of America Securities LLC veteran, replaced her. All six sit on the firm's executive committee. Williams' experience with the insurance industry at BofA was instrumental in identifying a potential backer in New York Life Insurance Co., which could provide support and, most importantly, capital while guaranteeing autonomy for the group. MCF now manages about $3 billion in funding commitments, or just a little over 1% of New York Life Investment Management LLC's $250 billion portfolio. Williams believes that's just a start. "We're still in the infancy stage," he says. Being in Chicago has helped, not only for its central location, which makes for easier travel in the U.S., but also in terms of talent, the principals say. Chicago has a rich pool of experienced cash-flow lenders, having hosted an array of financial institutions, including Continental, Merrill Lynch & Co., Heller Financial Inc. and one of GE's strongest merchant banking offices. However, not long after MCF's founding, competition intensified with the advent of structured finance vehicles and hedge funds. To set itself apart, MCF offered a streamlined process. Many large institutions typically have a multilayered credit approval system that may involve several groups of people in different locations. "Because of that linkage, you may get far down the approval chain before you get to a no," says Clark. "All six partners deal with a transaction from start to finish, and that hasn't changed since day one." The firm has also focused on consistency in executing deals. Consider a recent one sponsored by Parthenon Capital and Century Capital Management LLC involving the formation of Kansas City. Mo., retail insurance brokerage Ascension Insurance Inc. MCF first proposed in November to underwrite a $60 million facility that included a $25 million acquisition line and a $9 million unfunded revolver. Between then and the closing Feb. 21, markets tightened. But, says Winterer, Madison didn't waver in its terms or approach. "They led and delivered on the terms they initially quoted, while other potential participants were struggling because of internal distractions," he says. Given the market dislocations, unfunded credit facilities can be an issue for some lenders. One participant had a change of heart, and MCF ended up taking down extra exposure. As the firm expanded -- it's now 60 strong -- its capabilities expanded beyond acting as a single bank provider to small companies. Today, it's just as comfortable underwriting credit facilities up to $200 million, Williams says. Its average hold size -- that is, the part of the underwriting it retains on its books -- has also grown to $18 million, with a maximum of $45 million. In the Bollinger deal, which was fully syndicated and oversubscribed, its hold is between $25 million and $30 million. Unlike lenders that prefer to only lead transactions, MCF has no qualms about club deals, which midmarket sponsors appreciate, particularly those that only undertake a few deals a year. The firm says it insists on a thorough risk analysis. In the first half of 2007, it was much more selective, says Clark, though it still did the same number of deals last year (103) as in 2006. What it didn't do, Williams says, was book assets "at what we'd consider as irrational, unsustainable levels" -- deals that were priced too thinly or were structured with no covenants. The firm would not disclose returns, but Williams says co-investing equity alongside sponsors gives it equity-like returns across a highly diversified portfolio. Defaults have been "extremely low," compared with the market, says Williams, though there have been some recent write-offs. What's changed for MCF is that while it had to work harder in the first half of 2007 to put capital to work with the right sponsor and the right terms, its certainty of closing or being part of a financing package has now improved, says Williams. Not surprisingly, its league tables rankings have recently jumped to the No. 2 slot, below GE Capital, from being far down the list in prior years, according to Reuters' Loan Pricing Corp.'s data. Because sponsors are stuck with lenders who later renege on
commitments, says Williams, "that sort of realization has led them to
think it matters who you go to bed with." Plus, he concedes, it helps
to have the New York Life name to throw out when it comes to stability
of capital. -- Vyvyan Tenorio
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Earlier this year, as the credit markets deteriorated and M&A slowed to a trickle, Madison Capital Funding LLC, a middle market lender based in Chicago, doggedly pursued commitments to financial sponsors. One of these was to Evercore Capital Partners, which had been negotiating for several months to acquire a majority stake in insurance broker Bollinger Inc. for $250 million.
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