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Crescent's 1st CLO of 2019 features a la carte senior notes

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Crescent Capital Group's most recent CLO demonstrates the growing complexity of have-it-your-way deal structures as managers tailor deals to the requirements of particular investors

According to S&P Global Ratings, the $509.2 million Atlas Senior Loan Fund XIII will issue six tranches of AAA rated securities. While it's not unusual for open-market collateralized loan obligations to issue more than one senior tranche, typically there are no more than three. And typically, what distinguishes them - and determines how much spread investors demand - is the maturity.

In this case, however, not all of the AAA rated tranches rank equal in payment priority. Some pay a lower spread over Libor because they are more AAA than the others. While interest and principal are allocated to all of the class A debt proportionally, the portion that goes to A-2 is paid to the A-2A-N and A-2A-F notes (pro rata) before the A-2B-F. This results in a little more credit support to the A-2A-N and A-2A-F notes than the other components of the class debt.

The deal is the first of the year for Crescent, and previously priced on Feb. 22, according to data from Refinitiv.

The lengthy capital stack fits with a trend of managers offering more options for investors who have grown reticent since the fourth quarter, especially in floating-rate instruments since the Fed last year announced a slower rate-hike schedule.

The investor slowdown has prompted creative managers to build out capital stacks that meet specific investor needs and demands; the Crescent deal appears to fit that mold.

The six classes of senior securities in Atlas XIII include fixed- and variable-rate notes as well as a tranche sold as a loan.

The first-position $1.5 million Class X offering is pays Libor plus 100 basis points followed by the $225 million Class A-1-L loan paying 145 basis points over Libor. Another A-1 tranche (Class A-1-N) totaling $10.83 million in notes also pays 145 basis points.

But both A-1 tranches are priced wider than the 141 basis point spread on a Class A-2A-N tranche that ranks fourth in payment priority.

The A-2A-N notes likely received the tighter spread due to a higher overcollateralization figure of 167.31% compared to the 153.85% of the Class A-1 securities, as well as a subordination bump of 41.14% over the A-1 tranches' 35.99% level.

(A Class A-2A-F tranche in the fifth position also has the superior OC and subordination levels, but those notes totaling $36.55 million notes pays a a fixed-rate of 3.95%.)

The reason for the A-2 notes' higher OC/subordination levels, as detailed in S&P report data, was the lack of "pro rata" interest-payment rights for a sixth senior-note tranche immediately below them: $7.18 million in Class A-2B-F bonds.

Under the Atlas XIII interest payment schedule, the cash flow due the Class X, A-1 and A-2 securities are paid pro rata, or in proportion, to what is owed each for class; any shortfall comes out equally among all the X/A-1/A-2 securities.

But within the A-2 securities grouping itself, pro rata proceeds only go to the first two tranches, meaning any shortfall in A-2 interest payment stream is first fully deducted from proceeds targeted for the A-2B-F. That provides the two higher A-2 notes the added the credit support in excess the A-1 notes' investor protections.

(Although lacking pro rata treatment, the A-2B-F bond investors did gain a higher 4.32% fixed-rate coupon commensurate with the additional risk.)

S&P is rating only a portion of the senior notes, applying AAA ratings to the X, A-2A-N, and A-2A-F notes. It is not rating to the A-1 loan or notes, nor the A-2B-F notes lacking pro rata rights.

The deal also includes two tranches of fixed- and floating-rate B notes totaling $52.5 million, and three tranches of deferrable Class C, D and E notes adding up to $83.5 million. The subordinate equity tranche is $47.7 million.

The new portfolio will have a two-year noncall, plus a four-year reinvestment period.

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