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August 24, 2016  

Candlewood Adds Direct-Lending Vehicle

Candlewood Investment is getting into the direct-lending business.

The $1.8 billion fund operator, until now focused on structured products and distressed corporate debt, has raised $100 million for a new fund that originates commercial loans under a Small Business Administration program that guarantees a portion of the principal. The New York firm recently purchased one of only 14 SBA licenses available to non-bank lenders.

The vehicle, Candlewood Opportunity Fund, also invests opportunistically in consumer loans via so-called flow agreements with lenders. The manager is aiming for returns in the mid-to-high teens.

The fund has a private equity-like structure, with a two-year drawdown period, a one-year reinvestment period and a two-year wind-down period. Candlewood held a second close for the vehicle late last month. It is offering discounted fees to investors who contribute the first $150 million of equity, and would hold a final close at some point above that amount — likely late this year or early next year.

The fund is positioned to capitalize on a pullback by banks and other traditional lenders that has led to a surge in the volume of so-called SBA 7(a) loans, which typically carry guarantees for 75% of their balances. Total issuance of 7(a) loans jumped to $23.5 billion in fiscal-year 2015, from $12.4 billion in 2010.

Candlewood has formed a lending unit called Harvest Small Business Finance to write SBA loans of up to $5 million. Candlewood Opportunity Fund plans to sell the guaranteed portions of those loans to banks, which don’t have to hold regulatory capital against those positions. As a result, banks generally are willing to pay prices equal to 110% of face value.

As for the unguaranteed portions, Candlewood plans to retain those pieces and possibly securitize them down the road. Under the SBA’s program, the unguaranteed slices of 7(a) loans aren’t subordinate to the guaranteed portions.

The fund is led by Greg Richter and Brian Herr, who also run Candlewood’s structured-product hedge funds. To set up the loan-origination program, the firm last year hired David Lehman, Jim Regan and John Slonieski.

Regan, who oversees commercial loans, joined from Credit Suisse, having previously worked at ABN Amro, Amherst Securities and Cohen & Co. Lehman, a mortgage specialist, last worked at Lone Star Fund’s Hudson Advisors unit, and earlier spent time at Washington Mutual and Morgan Stanley. Slonieski is focusing on consumer loans. He previously spent 15 years at Credit Suisse, where he most recently originated and structured consumer-asset securitizations.