Fitch Expects to Rate NewStar's Senior Notes 'BB-'
OREANDA-NEWS. Fitch Ratings expects to assign a long-term rating of 'BB-' to NewStar Financial, Inc.'s (NewStar) proposed upsizing of up to $50 million under the same terms as its current outstanding senior unsecured notes. The notes will rank pari passu with existing senior unsecured notes issued by NewStar.
In April 2015, the company issued $300 million of 7.25% senior unsecured notes due May 1, 2020. Proceeds from the issuance are expected to be used to fund portfolio investments and for general corporate purposes.
The expected note issuance is consistent with Fitch's expectation that leverage will meaningfully increase over the next two years, as the company plans to use incremental borrowings to fund net portfolio growth and improve shareholder returns. Fitch calculates NewStar's leverage on the basis of debt-to-tangible common equity, without affording any equity credit to the company's subordinated notes. On this basis, Fitch calculates that NewStar's leverage amounted to 4.8x on a GAAP basis as of Sept. 30, 2015. Pro forma of the proposed incremental note issuance, leverage would increase incrementally to 4.9x, which remains consistent with the management's leverage target of between 6.0x-6.5x.
KEY RATING DRIVERS
IDRS AND SENIOR DEBT
The expected rating on NewStar's proposed unsecured note issuance is equalized with the company's long-term Issuer Default Rating (IDR), reflecting Fitch's expectation of the sufficiency of stressed unencumbered assets relative to unsecured notes.
The IDR and Stable Outlook reflect NewStar's middle market direct lending franchise, well diversified portfolio of senior secured loans, demonstrated underwriting track record, modest but growing asset management platform, diversified funding profile and seasoned senior management team. The rating also reflects the expected benefits of NewStar's strategic partnership with GSO Capital Partners (GSO), a subsidiary of The BlackStone Group L.P. (long-term IDR 'A+', Stable Outlook) and Franklin Square Capital Partners.
These strengths are counterbalanced by NewStar's concentrated business model, outsized exposure to middle market borrowers, high mix of secured funding, lackluster financial performance relative to stated targets, shifting strategic direction over time and planned rapid growth supported by increased leverage. These constraints are set against the backdrop of a highly competitive middle market underwriting environment, which could pressure asset quality in the coming years, particularly in the context of NewStar's growth aspirations.
IDRS AND SENIOR DEBT
The rating of the senior unsecured notes is sensitive to changes in NewStar's IDR and the level of unencumbered balance sheet assets in a stressed scenario, relative to outstanding unsecured notes.
Positive rating drivers for the IDR could include continued demonstration of stable asset quality performance, particularly for more recent vintages underwritten under increasingly competitive conditions, increased funding diversity, and successful execution of the strategy to grow the portfolio, improve profitability, and realize synergies from the GSO relationship. Reduced leverage relative to current targets, although not expected based on management's articulated strategy, could also contribute to positive rating momentum.
Negative rating drivers for the IDR would include material deterioration in asset quality, a migration away from the primary focus on senior secured loans and toward more junior investment positions, or an increase in leverage beyond the forecasted level. The provision of financial support to non-recourse funding sources which impairs NewStar's financial position would also be viewed negatively.
Fitch assigns the following expected rating:
NewStar Financial, Inc.
--Senior unsecured notes 'BB-(EXP)'.
Fitch currently rates NewStar Financial, Inc. as follows:
--Long-term IDR 'BB-';
--Short-term IDR 'B';
--Senior unsecured notes 'BB-';
--Subordinated notes 'B'.
The Rating Outlook is Stable.