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Angel Oak gains rating bump for next bank debt CDO

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Angel Oak Capital has secured a higher credit rating for its third securitization of community bank subordinated debt. The private equity firm, through its collateral manager affiliate Buckhead One Financial Opportunities, has garnered a provisional Aa1 rating from Moody’s Investors Service for the Class A notes of the $215.8 BFNS 2019-1. That's one notch higher than Aa2 on the comparable tranche of its previous publicly rated subordinated securitization.

The new issuance had a higher rating, according to Moody's, due to a higher credit-quality pool of banks, a lower cost of liabilities as well as a lesser concentration of 38 obligors, compared to 25 in BNSF 2017-1.

Six classes of notes will be issued in the transaction, five of which carry fixed-rate coupons; the exception is a $3.5 million Class X tranche, which is first in line to receive interest payments, but does not earn principal. The Class X notes carry an Aaa rating, similar to the Class X notes from the $155.2 million BNSF 2017-1 transaction from January 2018.

The Aa1-rated Class A notes total $146 million, with a 4.147% coupon. An A2-rated Class B tranche of notes total $6.25 million; the Baa3-rated Class C notes tranche is sized at $19.3 million; and the Ba3-rated Class D notes total $11.5 million. An unrated tranche of preferred shares makes up $29.25 million of the collateral pool.

The new deal is backed by a static pool of bank debt. Most of the assets (98.3%) are subordinated debt instruments issued by 36 banks raising funds to build capital. The remaining 1.7% consists of a senior note offering by a bank and insurance company, according to Moody’s. Approximately 60% of the securities were issued in the past year. Subordinated debt notes are usually underwritten with 10-year maturities, but have expected five-year payoffs due to annual step-up interest rates that begin rising in year six of a deal after the five-year non-call period.

Moody’s did not disclose the names of banks, but noted that it rates two of the institutions. The top 10 concentration of banks makes up 45% of the pool's assets; another potential weakness is the "significant amounts" of other debt that a number of the bank holding companies in the pool have, according to Moody's.

While the pool is static, deal documents permit limited reinvestment in new assets should a debt-issuing bank in the pool has been acquired or merged.

Buckhead One was established in June 2017 as a risk-retention compliance vehicle for Angel Oak Capital Advisors, a specialist in structured and corporate debt. Angel Oak’s affiliates have invested in over $1 billion in community bank subordinated debt across five funds in the past four years – which led to the first privately placed sub-debt securitization, in 2015.

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