Amidst a slow launch to the 2016 CLO and leveraged loans market, CreekSource LLC has issued its second $300 million CLO offering in just over a month with the launch of Mill Creek CLO II.
CreekSource has priced its latest offering at wider-than-average spreads as it targets primarily first-lien senior secured loans with better-than-average speculative-grade ratings quality, according to a Fitch Ratings presale report.
The CreekSource-managed CLO is being offered in five tranches, not including a $30 million subordinated tranche that will include a retention slice to comply with European risk-retention rules (the portfolio does not meet with forthcoming U.S. risk-retention requirements).
The ‘AAA’-rated Class A notes tranche totals $196.5 million, with a spread of 172 bps over three-month Libor (wider than the 162 bps spread for the AAA tranche of the $300 million Bean Creek CLO that CreekSource issued in December). The Class B notes totaling $29.2 million are rated ‘AA’ by Fitch with a spread of 240 bps over Libor, while the $12 million in Class C notes are rated ‘A’ with a spread of Libor plus 350 bps.
The lower-rung Class D notes in an $18 million tranche are rated ‘BBB-’, with a spread of 450 bps over Libor, and the unrated Class E notes totaling $14.4 million are at 740 bps over Libor.
Goldman Sachs is the arranger, and Wells Fargo is the trustee and collateral manager.
The report did not indicate the percentage of loans CreekSource has identified or lined up for investment into the Mill Creek II pool, which will come with a standard four-year reinvestment and two-year noncall period.
But Fitch notes that Mill Creek II will carry loans with average weighted junk ratings of ‘B+/B’, or slightly above average credit quality than other CLOs placed since the fourth quarter of last year. Its target weighted average ratings factor (WARF) number of 2401 is also lower and less risk-exposed than other recent CLOs that average 2711 WARFs.
WARF, based on Moody’s Investors Service ratings, is an independent numerical representation of the corporate family ratings of individual entities within a securitized portfolio. The Moody’s WARF scale ranges from 1 (‘Aaa’ investment grade) to 10,000 (‘Ca-C’ speculative-grade), with lower numbers indicating lower expected levels of risk.
The portfolio’s risk mitigation efforts will also mean it will contain no more than 65% “cov-lite” loans, and CreekSource will restrict second-lien and unsecured loans to 5% of the assets.
The lowered risk is likely a factor in the lower credit enhancement figure (34.5%) for the Class A notes than seen in CLOs (36.7%) priced between Oct. 1 of last year and Feb. 1, 2016.
CreekSource’s launch of Mill Creek II is on the heels of its Dec. 30, 2015 marketing of its Bean Creek CLO Ltd. portfolio that was underwritten by JP Morgan. Bear Creek was also set at $300 million. Both CLOs are well below the average portfolio amount ($474.5 million) of recent CLO issuances since the fourth quarter of last year.
The CreekSource activity belies the slow start of CLO issuance to the year – only two deals priced in January, totaling $872 million, according to Thomson Reuters LPC. The pipeline of new senior loans issued for CLO purchase has also slowed to a trickle to start the year, with volume falling to $18 billion in January. That’s far off the pace of the $783 billion in senior loans issued in 2015, the third-best year on record for loans.
CreekSource, considered a “relying advisor” by Fitch due to its limited prior operating history as a CLO manager, is an affiliate of subadvisor 40/86 Advisors.