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Credit Suisse preps 2nd CLO in 2 months as issuance picks up

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Credit Suisse Asset Management got the year off to a slow start, but it may be making up for it. The CLO manager is readying a $601.7 million CLO that is its second of 2019. It comes just one month after pricing of its first deal of 2019.

Madison Park Funding XXXV is part of a wave of new issuance in April; including this deal, there have been 19 totaling $10.7 billion. That's close to the $11 billion total for the entire month of March. It brings volume for the year to date to $38 billion, according to research published by JPMorgan.

The latest deal is not expected to close until May, but has a preliminary Class A-1 price spread of 133 basis points over three-month Libor, according to S&P Global Ratings and Fitch Ratings. That is the same rate paid to investors of CSAM's previous deal. Five other tranches of notes will be issued, including a $27 million Class A-2 tranche priced at a spread of 170 basis points. The A-2 notes have a triple-A rating from Fitch only.

A $60 million class B tranche pays a coupon of 190 basis points over Libor, and has a preliminary AA ratings from S&P. S&P also assigned an A to the $42 million Class C tranche, a BBB- to the $33 million Class D tranche, and a BB- to the Class E tranche. The Class C, D and E notes all have deferrable interest features.

Fitch did not rate the lower-ranked debt securities.

The deal will have a standard two-year noncall and five-year reinvestment period.

CSAM has identified approximately 76% (or $458.7 million) of the collateral for the deal. S&P's report shows the deal's identified portfolio thus far has an oversized exposure (approximately 15%) to loans with the lowest single-B rating. That could place the transaction at risk of approaching its 7.5% cap on triple-C assets, in the event loans are downgraded. However, the exposure to the lowest single B rating of B- (or the equivalent B3 Moody’s Investors Service rating) is set to fall to approximately 11-12% when it is fully ramped, per S&P.

CSAM expects to add more higher-rated B+/B1 loans in its final portfolio. It has a target of nearly 30% B+ rated loans in the portfolio, up from only around 15% so far, according to S&P.

Rising levels of lower-rated single-B loan assets is considered a key risk for CLOs. Approximately 15% of all B3/B- loans in the JPMorgan leveraged loan index currently trade below 90 cents on the dollar, which the bank says indicates that they are at risk of a downgrade to triple-C.

According to JPMorgan, 10.51% of B3-rated loans tracked in its leveraged loan index are held by CLOs; CLOs also hold 14.28% of the loans included in the index with a similar B- rating from S&P. (Last fall, Moody's estimated total B-/B3 exposure in all outstanding CLOs was more than 22%.)

The new Madison Park transaction has a maximum nine-year weighted average life, and a weighted average spread, or the difference between the interest earned on the collateral and interest paid out on notes, is 3.41%.

Of the 170 corporate borrowers included in the CLO, the largest obligor (a wireless telecommunication services firm) accounts for 1% ($5.99 million) of the notional amount of the transaction.

CSAM, one of the largest managers of U.S. market CLOs, has 27 U.S. CLOs under management totaling $21.1 billion.

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