Solar Capital Ltd. announced that on July 31, 2017, it acquired NEF Holdings, LLC ("NEF"), which conducts its business through its wholly-owned subsidiary Nations Equipment Finance, LLC. NEF is an independent equipment finance company that provides senior secured financings to U.S. based companies. Solar invested approximately $210 million to effect the transaction.
The acquisition is another important step in Solar's commitment to expand its direct lending investment channels and provide differentiated sources of growth. The addition of NEF, with its infrastructure and experienced underwriting team, further enhances Solar's platform as a diversified specialty finance company. Solar directly sources and underwrites cash flow, asset-based, life science and now senior secured equipment financings. Pro forma for the NEF acquisition, approximately two-thirds of Solar's comprehensive portfolio is expected to be comprised of specialty finance investments with the remainder from directly originated investments in senior secured cash flow loans to sponsor-owned companies.
NEF was founded in 2010 by former GE Capital equipment finance professionals, and has underwritten approximately $1.0 billion of equipment financings since inception. The portfolio is highly diversified, with an average funded exposure per borrower of $2.3 million. Collateral securing the portfolio consists of long-life, essential-use assets such as trucks and trailers, machine tools and equipment, which can be readily liquidated.
Solar acquired NEF for a modest premium to tangible book value. NEF is expected to distribute substantially all of its earnings to Solar on a quarterly basis. Solar anticipates its investment in NEF will generate a cash yield consistent with its other specialty finance assets and expects the acquisition to be immediately accretive to investment income in Q3 2017. Based on NEF's existing portfolio, the investment would currently generate quarterly net investment income for Solar of approximately $0.04 to $0.05 per share. Pro forma for the acquisition and based on debt outstanding at June 30, 2017, Solar's leverage would have been 0.55x debt-to-equity.
"We believe that NEF offers a compelling opportunity to invest in an established business, whose management team has a strong track record," said Michael Gross, Chairman and CEO of Solar. "The addition of NEF's sourcing channel enhances Solar's flexibility to originate investments across multiple business lines in order to find the best risk reward opportunities while also increasing the earnings power of Solar's portfolio."
"We believe this acquisition further positions us as a diversified specialty finance company, providing capital solutions to middle market companies. NEF, with its 100% collateralized loan portfolio, complements Solar's other specialty lending businesses," said Bruce Spohler, Chief Operating Officer of Solar. "We believe NEF's business is highly scalable and provides Solar with access to another differentiated middle market corporate credit platform focused on collateral-based/LTV lending. NEF offers attractive risk-adjusted returns and has a low correlation to the broader non-investment grade credit markets."
"We are excited about NEF's relationship with Solar Capital and the growth opportunities it provides the NEF platform," said Phil Carlson, President and Chief Executive Officer of NEF. "Solar's stable, long-term funding will enhance NEF's ability to provide innovative financing solutions to our clients."
Keefe Bruyette & Woods, Inc. acted as the exclusive financial advisor to NEF in connection with the transaction.
Solar Capital Ltd. is a closed-end investment company that has elected to be treated as a business development company under the Investment Company Act of 1940. The Company invests directly and indirectly in leveraged, middle market businesses in the form of senior secured loans, including unitranche loans, as well as mezzanine loans, and equity securities.
NEF specializes in providing equipment leases and loans across a wide spectrum of industries including transportation, manufacturing, construction, aerospace and marine for small and medium sized businesses primarily in the United States. NEF's transactions range in size from $1 to $50 million and focus on the underlying collateral value. Nations uses this collateral specific approach for both new and used equipment financings with terms typically between three and seven years.