After wrapping up its Landmark III CDO less than two months ago, Aladdin Capital Manage-ment is busy in the market again, putting together its very first loan fund, which is expected to total more than $500 million.
"After receiving reverse inquiry from existing CLO clients, Aladdin has customized the structure of the fund to meet the liquidity and return objectives of investors," said Gilles Marchand, managing director and senior portfolio manager at Aladdin. He explained that the fund's formation is a response to investors looking for a leveraged fund with more liquidity than a CLO.
The move furthermore illustrates the firm's confident outlook on value and supply in the loan market. "We are pretty positive on the market going forward. Credit fundamentals have definitely improved, which bodes well for higher returns from lower default rates and less stress in the portfolio. We also expect a lot more
M&A activity, as sponsors now have access to the high yield market to fund their acquisitions," said Joe Moroney, a portfolio manager at Aladdin.
The firm also expects pricing levels to improve. "Market pricing is tight, but it's cycled in the past, and an active calendar from increased M&A activity will improve the supply-demand technical situation," said Marchand. He also noted that supply has increased in the high yield market, which has tended to be a leading indicator for deal flow in the loan market.
But regardless of the current conditions of the U.S. loan market, marketing for the new fund is underway. Aladdin is targeting investors, such as mutual funds and pension funds for example, that are fond of the loan product as an investment class, but need a more liquid vehicle to invest in, said Moroney. "Some people can't invest in CLOs due to illiquidity...but there are no lockups in the loan fund," he added.
Indeed, Aladdin's fund is expected to be liquid for its investors. "The fund will make monthly distributions, providing good current income, and, because floating-rate secured loans are inherently an interest rate hedge, they should outperform the universe of fixed-rate investments in a rising interest rate environment," said Marchand. He added that a 10% return rate might be achieved given certain assumptions. The fund may be leveraged up to eight times, which is much more conservatively leveraged than a CLO usually is, Moroney noted.
Aladdin is speaking with several investors in the U.S. and abroad, said Marchand, declining to specify a level of investor commitment thus far. The fund is set to roll out at the beginning of next quarter.
In terms of investment parameters for the fund, Aladdin plans to focus on the same par loans it focuses on for its CLOs, Moroney said. The fund will invest wholly
in U.S. dollar-denominated loans, and investments will be diversified across several sectors, he stated.
"Mr. Marchand intends to limit risk by avoiding industries and individual assets that he believes will not add value to the portfolios, such as those with historically high default rates and no barriers to entry...the team prefers to maintain an average portfolio credit rating of approximately double-B, as well as an average Libor spread of approximately [275] basis points, almost exclusively in senior secured loans," said Standard & Poor's, describing Aladdin in a 2003 CDO Manager Focus report.
Additionally, although this is Aladdin's first loan fund, the firm's staff has previous experience in fund management. For example, Marchand previously managed redeemable funds while at Merrill Lynch that consisted of $11 billion in assets and comprised 10 mutual funds and a CLO. Additionally, "The Landmark CLOs [co-managed by Marchand and Moroney] have exceeded their original cash flow assumptions targeting IRRs exceeding 20%, while maintaining robust quality ratios in a very turbulent credit environment," Marchand noted.
Stamford, Conn.-based Aladdin's most recent closed vehicle was its cash flow arbitrage Landmark III CDO, which closed last December and totaled $318 million. Bear Stearns arranged and underwrote the vehicle. The firm's two previous cash flow arbitrage vehicles are its Landmark I and Landmark II CDOs, which were completed in 2001 and 2002, respectively. Aladdin's other CDOs and fixed-income products include Aladdin I Synthetic CDO (2003), Aladdin CDO (investment-grade cash flow, 2002) and its GENIE Global Credit Fund (2003) - an investment-grade corporate hedge fund.
Aladdin Capital is a subsidiary of Aladdin Capital Holdings and currently manages more than $2.65 billion in assets.
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