Know Thy Creditor

Thomas H. Lee Partners founded its middle-market credit arm, THL Credit, just in time for the credit crunch. The credit group’s CEO, Jim Hunt, recently sat down with Privcap and outlined the opportunities in alternative finance, and also explained why borrowers should underwrite their lenders.

Trust Conquers All

Today’s macroeconomic environment has made deal terms a moving target—mitigate the risk by choosing a trustworthy and experienced lender, Hunt says. “Borrowers should know their lender’s track record in consummating transactions and after-sale service performance. Is the lender responsive to the changing conditions of the business?” says Hunt.

In addition to expertise, a borrower should inspect the lender’s balance sheet for signs of trouble. “What we did see during the course of the credit crisis is good companies with bad lenders found themselves under pressure to repay their loans because the lender needed to gain liquidity,” says Hunt.

Lastly, Hunt says you want to work with a lender that has credibility with creditors up and own the capital structure. That will come in handy if the business runs into trouble and needs to renegotiate its debt.

Poised for Growth

Hunt isn’t surprised to see an increasing number of nontraditional lenders following in THL’s footsteps. In fact, as traditional fi- nance companies and banks continue to shrink their businesses, a hole needs to be filled. He expects alternative credit companies like CLOs to continue to grab a bigger piece of the debt business. Additionally, “long-term capital, like insurance companies, [should also] increase their market share,” says Hunt.

While THL Credit is industry agnostic, Hunt likes deals in the healthcare industry, particularly with companies that help provid- ers and patients trim costs. “While general surgical costs are being squeezed under the Affordable Care Act, there are also material opportunities for growth of businesses,” Hunt says.

Hunt also says the firm also generates an additional, if ancillary, benefit: In addition to PE-backed firms, THL Credit also lends to unsponsored business, giving it’s private equity arm a nice source of potential deal flow.

THL Credit’s Jim Hunt offers candid advice on picking a lender and tells why alternative finance is poised for growth

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