Crestline Denali Capital is preparing its first collateralized loan obligation offering since it was formed by the merger of two long-time CLO managers last fall.
Denali Capital CLO XII will issue a total of $358.2 million of notes provisionally rated by Fitch Ratings.
Although slightly smaller than the CLO issued by predecessor Denali Capital XI CLO in March 2015, this deal has similar attributes such as a four-year reinvestment period and two-year non-call period, a 36.5% credit enhancement level on the Class A stack, and a 10% senior overcollateralization cushion.
Crestline Denali Capital also manages CLO XI, but CLO XII is the first deal it has launched since alternative investment manager Crestline Investors in Fort Worth, Tex., announced last November a CLO partnership with broadly syndicated commercial loans specialist Denali Capital of Oak Brook, Ill.
Impending rules requiring managers to hold on 5% of the economic interest of deals has been driving small and medium-sized firms to pair up. Even larger managers, such as
Denali Capital CLO XII is structured with two series of Class A-1 notes ($192.25 million) and Class A-2 notes ($30 million) on top, both provisionally ‘AAA’ rated by Fitch Ratings. The A-1 notes will pay three-month Libor plus 160 basis points, while the A-2 notes will be at Libor plus 300 basis points.
The remaining slices are unrated. The CLO’s Class B-1 and B-2 tranches total $22.88 million and $20 million respectively, and carry a 24.3% CE; the Class C notes total $20 million (CE of 18.4%) and the Class D notes are $19 million, with a 13% CE. The mezzanine tranches of Class E and F notes total $22.4 million.
Fitch states the manager has identified 195 assets from about 190 high-yield obligors, totaling approximately 97.3% of the target initial par amount.
The most subordinated notes totaling $31.4 million will represent a residual equity tranche that will be structured to meet both existing European and forthcoming U.S. risk-retention standards.
The indicative portfolio is to consist of 99.4% first-lien loans, with 94.1% of them having strong recovery prospects or a Fitch-assigned recovery rating of ‘2’ or higher. The average asset quality of the portfolio is ‘B/B-’, according to Fitch, comparable with other recent CLOs.
The target weighted average ratings factor (WARF) that determined the level of credit risk of underlying assets is 2800, in line with the average WARF of 2711 in CLOs issued during the 2015 fourth quarter and the 2015 first quarter. (WARF is determined by assigning and averaging the numerical representations of the corporate rating of a portfolio’s individual entities – ranging from 1 (‘Aaa’) to 10,000 (‘Ca-C’).
Crestline Denali Capital must maintain a minimum 92.5% of first-lien senior secured loans in the portfolio, and is limited to accruing no more than 20% international and 7.5% second-lien loans. The portfolio will launch with about 1.7% of the assets from ‘CCC’ rated obligors, well below the 7.5% limit on ‘CCC’-rated collateral. No more than 2.5% of the assets can be concentrated in a single obligor, as well.
Crestline Denali’s top five industries at launch will include a 14.6% concentration in business services, 10.1% in retail, 7.1% in healthcare, 5.6% in chemicals and 6.4% in banking and finance.
The principals of the two firms have had a relationship since Denali launched in 2001. But the new alliance from last fall added the smaller Denali to the Crestline fold and tasked it with sourcing and managing syndicated senior loans and related assets. Under the agreement, the CLOs will be sponsored by Crestline and managed by Crestline Denali Capital.
Crestline, founded in 1997 and now with approximately $8 billion of assets under management. Denali has approximately $1.5 billion in assets, primarily through CLOs.
