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Interview
conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published – June
18, 2012
CEOCFO:
Mr. Hunt, would you give us an overview of THL Credit?
Mr. Hunt:
THL Credit, Inc. is a publicly traded company on the Nasdaq, with a ticker
symbol of TCRD. We are structured as an externally managed business
development company (BDC) and are leading investors in the US middle market
as a junior capital debt provider. Our capital is used to finance growth,
acquisitions and recapitalizations, or to fund change of control.
CEOCFO: Are there particular industries
of focus for THL?
Mr. Hunt:
We are industry agnostic, but certainly have deep industry vertical
expertise in retail, consumer, software, healthcare and food related
businesses.
CEOCFO: What do you look for in a
company?
Mr. Hunt:
There are several things that are most important to us in a company. We
start with good people. Our motto is that we finance great companies. Our
definition of a great company is good people with a predictable and growing
business. We tend to like companies with good growth characteristics. That
means they have a product or a service that has succeeded and will continue
to succeed.
CEOCFO:
Would you give us examples of some of your companies?
Mr. Hunt:
Absolutely! Some examples would include a recent investment in a leading
retailer of western wear. The name of the company is Shepler’s, and we were
the lead investor in second lien and subordinated debt. Another example is a
company where they are a value added consultant to hospitals in managing the
customer and patient experience. Their name is StuderGroup and we have a
leading investment in subordinated debt. One more example showing the
diversity is that we were the lead unitranche lender to a company named ATAC,
which provides pilot training for the US Navy and foreign militaries. We
have a diverse group of industries, but the common theme is they have a
track record of success and we are comfortable that they will continue to
prosper.
CEOCFO: When you and your team look at a
potential candidate, how do you weigh what you see on paper with instinct
and experience?
Mr. Hunt:
Certainly a good credit decision is very quantitatively, based with a lot of
very objective data. Then it is subjective in terms of our assessment of the
management and industry prospects. In many respects, it is more of a liberal
arts business than anything else. Credit is common sense applied in
combination with quantitative measures.
CEOCFO: How do you ensure that companies
that you take on, in addition to having all the right things on paper will
be receptive to your input?
Mr. Hunt:
One of the things that we hold ourselves out and pride ourselves on is our
history and tradition of being good capital partners to companies in which
we invest. As a business development company, we offer management expertise
to our borrowers. Therefore, part of our selection process of borrowers is
those that we think that we can have a good dialogue with and if we think
they will value our input, if it is constructive.
CEOCFO: Would you tell us about the
cohesiveness of your team?
Mr. Hunt:
I am glad you noticed that. Our team has been together for a long time. In
terms of the investment committee, we have a 5-person investment committee
and we have been together for 5 years since the founding of THL Credit. Sam
W. Tillinghast and I go back to 1990 together. We built SunAmerica Corporate
Finance, which was the private investment side of SunAmerica Inc. Then AIG
acquired us, and we took over private finance for AIG here in the United
States. W. Hunter Stropp, the other co-president and I started working
together in 2002, when he provided the majority of the capital for my
predecessor company, Bison Capital, which I co-founded in 2001. Christopher
J. Flynn was a member of Sam Tillinghast’s team at AIG and joined us to be
our Boston investment team leader.
CEOCFO:
THL has offices throughout the country; how does that work to your
advantage?
Mr. Hunt:
Like Tipp O’Neal said about politics, where all politics are local; well so
is the middle market. We target 17 cities around the United States in terms
of sourcing investment and we do that from our three city locations. It
would be irresponsible to be making middle market investments from the other
side of the country. Therefore, something that we care a great deal about is
not only do we know the community in which a company exists, we think we get
a chance to make a better investments by being close. We want to be within a
very comfortable day trip of the companies in which we are invested.
CEOCFO: What is the financial picture
like for THL Credit today?
Mr. Hunt:
Essentially, in the micro economies in which we are investing, we are seeing
a good underlying performance in our portfolio companies. We have a good
read on the US economy through our portfolio and we are seeing improvement
and growth. It is a somewhat bullish lens in that we are picking the best of
the best. A backdrop to that question and this opportunity is how compelling
middle market debt investing is in the US economy. There is more demand for
middle credit by middle market companies than there is supply. What has
happened is with the tsunami of increased regulation on lenders, is the
departure of hedge funds from lending directly to middle market companies.
That has created a meaningful supply-demand imbalance, which is good for us
at THL Credit. This opportunity for deploying capital to growing middle
market businesses should continue for a long period of time. We have
approximately 1,000 sources of investment opportunities. Of those, over 700
are middle market private equity firms and then 300 investment banks that
target the middle market. What they are saying to us is they are making more
presentations. There is going to be a very active second half of 2012, as
more companies consider transactions either to buy, to sell or to refinance.
Therefore, we are quite encouraged about what we are hearing from our
relationships with this group of 1,000 that we cover between our 3 offices.
CEOCFO: Why should investors pay
attention to THL Credit today?
Mr. Hunt:
First and foremost, we have carefully constructed the assets on the left
hand side of our balance sheet, so our goal has been careful investment
selection in building a durable group of portfolio investment. What that has
led to, the second factor is a growing and we hope stable dividend for
investors, and finally, we think we are offered more investment
opportunities and sometimes a premium return on our investments by being
known as a trusted value-added capital partner and investor. We invest
selectively and carefully, so they are durable investments and we are able
to generate an attractive dividend for shareholders. Therefore, in a time of
very low interest rates, we are generating what is a dividend, depending on
where the stock market is somewhere between 8% and 9.5%.
Broadly, the BDC community, in which we aspire to be a leading member, there
are 30 companies that are yield producing investment vehicles for investors.
More broadly, among the entire financial sector, BDCs should be considered a
very attractive choice. We do not have the regulatory challenges that are
affecting other companies, and product profitability challenges that are
affecting other financial services concerns. Therefore, we are at a very
attractive time to be considered as a prospective investment choice.
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