Mezzanine Debt Offers Unprecedented Value Versus First Lien, Says Tannenbaum

The spread between second-lien mezzanine loans and first-lien senior debt is the widest since Len Tannenbaum founded Fifth Street Finance in 1998. Tannenbaum, CEO of the firm which has $1.3 billion in assets, is seizing what he views as an opportunity in mezzanine. Tannenbaum spoke to Bloomberg Brief’sDavid Holley.

Q: How has the hunt for yield tickled down to the middle market?

A: Spreads are almost at historic highs between mezzanine and first lien. Mezzanine should normally trade 500 to 800 basis points higher than first lien loans: first-lien should trade at 7 percent, mezz at 13 percent. So that’s normal. Today we’re seeing senior almost at 4 percent, which is crazy. We’re seeing mezz holding out at 13 percent. We’re over 800 basis points in spread. I’ve rarely seen spreads this big in the 15 years I’ve done this.

Q: Do you expect this situation to continue?

A: You’re going to see high-yield funds come back out and pricings maybe normalize. Right now, prices are skewed. First-lien is way too tight. Second lien, mezz, is a great relative value.

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