Lender makes midsummer moves in health care niche

MidCap Financial is having an eventful July. At the start of the month, the commercial lender renegotiated the terms of its four primary lines of credit, bolstering its lending capacity to more than $900 million. Before the close of the month, the company plans to move into 11,000 square feet of space at 7255 Woodmont Ave. in Bethesda, nearly double the size of its current digs five blocks away.

Business is growing at a steady clip at MidCap, which closed 30 transactions totaling more than $375 million in the first half of this year. To meet that demand, the company has welcomed eight new hires in the past 12 months, bringing the total to 43 employees spread among Bethesda, Los Angeles and Chicago.

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MidCap, with $600 million in assets, provides debt ranging from $5 million to $200 million to a panoply of health care-related companies, such as senior housing, biotech and pharmaceutical firms. Demand for capital to invest in facilities, technology and equipment remains consistent within those industries, offering MidCap opportunities to build its loan portfolio, said chief executive Howard Widra.

“Our portfolio will grow 100 percent this year,” he said. “By extending those credit facilities and improving the terms on them, it enables us to compete more effectively, especially with banks, who have lower cost of capital.”

Since launching less than three years ago, MidCap has completed more than 85 senior financing transactions to the tune of $1.1 billion. The company found a niche market that was thirsty for capital as banks tightened the spigot on lending. As those traditional lenders ease the flow of credit and look for assets, Widra suspects competition will heat up.

“Some banks have historically shied away from health care because of the regulation and specialty aspects,” he explained, “but now it’s 20 percent of the economy and it held up so well during the downturn that there are more institutions realizing that they have to focus on it.”

The chief executive is confident MidCap can hold its own in part because of the firm’s experience in the sector. Twenty-four of the 27 people on MidCap’s initial staff worked together for at least five years at Merrill Lynch Capital Healthcare Finance, before the division was sold to GE Capital in 2008. Some senior managers had also worked together prior to Merrill Lynch at Heller Financial.

Meanwhile, the implementation of federal health care legislation should bode well for MidCap’s business in the long run as spending increases, though Widra is not banking on that prospect.

“We try very hard to build a business that is agnostic to changes in the health care industry by lending on hard assets or lending to businesses that are not directly exposed to legislative risk,” he said.

That strategy has helped the company amass more than $1.4 billion in capital commitments from a host of backers, including Lee Equity Partners, Moelis Capital Partners and Genstar Capital.

“The quality of their loan portfolio is exceptionally high, they have grown to [be] profitable and they continue to build assets,” said Genstar Managing Director J. Ryan Clark.

Widra said the goal is to generate a double-digit, after-tax return on equity for its investors. “We’re moving in that direction. There’s a lot of operating leverage in our business because we don’t have much cost to add scale,” he said. “We expect to get to $800 million to $900 million in loans at year end, and at that point we think we’ll be there.”