Carlyle's next European CLO has a Volcker Rule workaround
The Carlyle Group is readying its first European collateralized loan obligation of the year in a €413 million transaction, according to ratings agency presale reports.
Carlyle Euro CLO 2018-1 will launch with €400 million in mostly first-lien secured, broadly syndicated European corporate loans with a two-year noncall period and a four-year reinvestment period, managed by Carlyle affiliate CELF Advisors LLP.
The €226.8 million triple-A rated tranche will be priced at 71 basis points above the three-month/six-month negative Euribor rate, according to Moody’s Investors Service and S&P Global Ratings. The portfolio will also have a €43.1 million tranche of unrated subordinate notes paying only residual interest and principal payments.
Among its notable features will be the low cap on non-first-lien loan assets of 4%, a ceiling that includes mezzanine and second-lien loans as well as high-yield bonds.
Moody’s noted the CLO restricts Carlyle from agreeing to maturity changes to the portfolio’s underlying assets, which is “reducing the risk that the notes’ exposure period will increase” or that Carlyle would be forced to liquidate assets remaining at the CLO's maturity date.
Carlyle also plans on issuing exchangeable notes across the top five tranches (A-1 through Class C) of notes that will carry nonvoting restrictions on removal and replacement of the manager (other nonvoting notes will be issued, as well). Exchangeable notes allow U.S. institutional investors to buy into the portfolio without violating Volcker Rule’s restrictions on regulated U.S. banks having ownership stakes in CLOs with high-yield bond assets.
While the nonvoting notes could distort quorum requirements, Moody’s does not expect the feature to have a “material” negative impact on the rated notes since any notes held on behalf of CELF or a related party (such as in vertical risk-retention strategies) will also have no rights to vote on manager replacement and removal.
Carlyle Euro CLO 2018-1 is the global alternative asset firm’s overall 14th post-crisis Euro CLO, and among 18 managed by CELF with a total volume of €5.5 billion.
The 71-basis-point AAA discount margin is the third-tightest spread for a European collateralized loan obligation this year, behind the Feb. 1 pricing of the €509.3 million Barings LLC’s Euro CLO 2018-1 at Euribor plus 69 basis points and Ares Management’s debut Euro-denominated CLO European CLOX IX, which was issued Feb. 23 at 68 basis points.