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Crescent Capital adopts combo note strategy for next CLO

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Crescent Capital Group’s second primary-issue CLO of 2019 will feature a rare combination note offering, according to a presale report from Kroll Bond Rating Agency.

The $403.1 million Atlas Senior Loan Fund XIV will have seven classes of notes, as well as a combination securities tranche that will make up all or portions of three subordinate classes as well as the equity portion of the deal, Kroll’s report stated.

The combo note includes all the Class C notes ($17.4 million), a $1.1 million share (4.6%) of the $23.8 million Class D tranche and $6.5 million, or 19.6%, of the $33.15 million subordinated notes tranche representing the ownership equity stakes in the deal. (The subordinated notes in the combination structure are being transferred at a discount, according to Kroll.)

The combo note will not carry a coupon, but will receive amortize from the proportional interest and principal payments to the Class C (290 basis points plus Libor) and Class D (with a390 basis point spread) note classes, as well as distributions to equity. Interest proceeds can be diverted to equity holders and used to pay down the combo notes, as well.

Although uncommon in most CLO deals, 2019 deals sponsored by Conning’s Octagon Credit Investors, Tennenbaum Capital Partners and Ellington Management Group had combo notes blending unrated equity notes with higher-rated debt securities to produce investment-grade hybrid debt/equity tranches.

The combo notes are offered to investors, frequently insurance companies, allowing them to invest junk-rated or unrated equity notes that would otherwise be off limits due to the securities’ low- or non-rated status. For issuers, it widens the market for third-party equity investors.

The combo note has a preliminary investment-grade A rating from Kroll, which otherwise assigned only one other rating in the deal: an AAA to the $256 million Class A tranche, which priced at 143 basis points over Libor.

Crescent did not rate any of the underlying subordinate note classes, including the $48 million in Class B notes and $22.8 million in Class E notes that are also excluded from the combo note securities.

The transaction is the second this year for Los Angeles-based Crescent Capital, which priced the $509.15 million Atlas CLO 2019-13 in February through Jefferies at 145 basis points over Libor. Crescent manages nine U.S. CLOs totaling $4 billion in assets.

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