Ares Management is sponsoring its third CLO reissue transaction since April, replacing the notes from a 2015-vintage deal that had been pressured recently by shrinking yields and deteriorating credit metrics on the loans used as collateral.
Ares XXXVR CLO Ltd. is a $408 million transaction that is being underwritten by Deutsche Bank, according to a presale report from Moody’s Investors Service.
Among the changes from the original issue is a division of the $271 million in Class A notes into two tranches of Class A-1 notes ($240 million) and Class A-2 ($22 million). The first-position Class A-1 notes, which have yet to price, are gaining additional subordination (40% from 32.3%) with the inclusion of the second AAA tranche.
The Class A-2 tranche has an assumed coupon of 130 basis points over three-month Libor.
Los Angeles-based Ares is cutting the coupons on the subordinate notes: the $36 million Aa2-rated Class B tranche to 160 basis points from the original 215 basis point spread in September 2015; the $22 million in the single-A (A2) Class C notes to 190 basis points from 285; the $26 million in triple-B equivalent (Baa3) Class D notes to 280 from 345 basis points; and the sngle-B Class E tranche ($22 million, Ba3) to 540 from 585 basis points.
The allocation of $37.9 million in residual notes remains unchanged.
The notes are replacement securities for the original Ares XXXV transaction, which was issued before the onset of risk-retention regulations that have since been voided by a federal court decision.
Last September, Moody’s upgraded two classes of Ares XXXV’s notes (B and D) and affirmed the remainder as the transaction neared its the end of its reinvestment period. The upgrades were in anticipation of restrictions on new asset purchases that kept the deal well within stable ranges for weighted average life and overcollateralization ratios.
But Moody’s cautioned that the deal’s credit quality had deteriorated since September 2016. In particular were the weighted average rating factor of 2872, up from 2670 (a higher WARF rating indicates a higher percentage of lower-rated speculative-grade loan collateral), plus a weighted average spread tightening to 3.53% from 4.06% to squeeze cash-flow margins.
Those conditions have not improved in the replacement portfolio with an 81% identified portfolio, with a WARF of 2915 and a WAS of 3.35% on a majority of assets being acquired from Ares XXXV through participation agreements.
But the reissuance provides Ares the opportunity to actively trade and acquire assets to buoy portfolio performance, as well as grant more leeway on coverage tests. It features a relaxed treatment of discounted assets for overcollateralization test purposes, for example, and an allowance for higher WARF if recovery ratings exceed minimum levels, according to Moody's.
Also, cov-lite restrictions have all but been eliminated with an allowance up to 95% of the total portfolio.
In April, the $71.7 billion-asset company reissued notes replacing its $516.6 million Ares XXXII deal (also via Deutsche Bank), according to Thomson Reuters. Ares followed up in May by pricing through Barclays a similar reissue for its $1.23 billion Ares XXXI transaction originally issued in 2014 and refinanced in February 2017.