The Blackstone Group wowed the structured finance world last week when it launched the largest CLO since 1998.
At $1.022 billion, Monument Park CDO Ltd. is twice the size of most of the CLOs launched in the last four years. CLOs are normally structured to give their manager between three and six months to invest the funds. With so large a vehicle, that would be a tall order, so Blackstone persuaded Monument Park investors to extend its investment period to 18 months.
But there's another reason that Blackstone pushed for a longer-than-average investment horizon. Spread compression in the underlying loan markets is making it difficult for the managers of these vehicles to invest the funds they've raised.
"There's been somewhat more curbed issuance in CLOs recently, because the opportunity for arbitrage has gone down," said Marion Silverman, a senior director in the credit products group at Fitch Ratings. But loan-backed investment vehicles are still incredibly popular because of their stellar performance through the market downturn, said Silverman.
Indeed, the only structured debt product to have outpaced CLOs in dollar terms in 2003 was the multi-sector structured finance CDOs, which have also weathered recent market volatility better than most. However, most believe deals currently marketing will also face trouble ramping up, as the collateral market tightens.
Analysts expect CLOs to continue to outperform amid a slowing default rate and improving recovery rates. Spreads in the underlying market are also expected to stabilize over the next few months, and when they do, Blackstone will be ready to pounce.
"That's why the most compelling feature in Monument Park's structure is the 18-month investment horizon," said Dean Criares, head of Blackstone Debt Advisers, the nine-member team that manages the fund. "It's not like today determines the success of the CLO."
Criares anticipates putting about 95% of Monument Park's funds to work in senior secured loans from subinvestment-grade companies. The rest will be invested in even higher yielding assets. UBS is the placement agent for the fund, which will borrow up to $800 million for investment. This is the third structured debt investment vehicle set up by Blackstone since it got into the CDO business in January 2002. The firm now has $2 billion of funds under management for investment mainly in junk-rated loans.
CLO players not involved in the new transaction said that finding investments for a fund of this size in the current market environment is a tough task. What is more, persuading investors to allow the CLO more time to invest the funds is something only an established fundraiser could achieve. None criticized Blackstone for capitalizing on its track record in other areas of investment. Nor does the firm deny that it had a captive audience for the fundraising venture.
"Blackstone's name carries an awful lot of weight in terms of investment appetite," said Criares, admitting that the bulk of the new fund's investors already had investment relationships with the Blackstone Group. "The demand is clearly driven by Blackstone, and the faith people have in that name."
And while Blackstone Debt Advisers has its hands full with three funds to manage, there is nothing to stop Criares and his group from looking beyond the confines of collateralized loans.
"We have a strong group of people focused primarily on noninvestment-grade issuers, but we know debt, so if we were to do anything else at this point, it might be to focus more on the other debt instruments out there," Criares said.
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