Deerfield Capital Management is preparing to manage a market value CLO backed by European leveraged loans. The deal is Deerfield's first foray into the European CLO market. The 300 million ($376 million) CLO is expected to price this week via Banc of America Securities, according to a source close to the deal.
The deal - on the heels of several MV CLOs (Market Value CLOs) that have recently hit the European market - comes at a time when arrangers are once again kicking the tires of cash market value CLO structures. Market value structures, which are similar to hedge funds, provide more flexibility to trade in and out of credits when opportunities emerge from pricing fluctuations.
Deerfield's Coltrane CLO is backed by a portfolio of senior secured bank loans originated in Europe. The deal is structurally similar to the Structured Enhanced Return Vehicle Trust program arranged in the U.S. by BofA, according to Derivative Fitch. Coltrane has a 360-day ramp-up period and an expected January 2022 maturity. The offering carries an initial weighted average spread of 2.75% and makes quarterly interest payments. Investors have the option to vote for note redemption after the January 2013 lockout date. The maximum leverage factor is four-to-six times, according to a Fitch presale report.
Despite a less liquid secondary market for leveraged loans in Europe, Fitch analysts said the deal's advance rates - which determine how much a CDO can borrow against a particular underlying asset - mirrored those used in the U.S. Underlying loans that are not large enough to be considered "jumbo" will carry a lower advance rate, however.
Increased sector issuance
Some market participants anticipate MV CLO issuance to increase both in Europe and in the U.S., as stubbornly tight spreads are expected to give way to an upswing in pricing volatility. The CLO market could also be shifting from total return swap deals to fully funded deals. The combination of higher spreads relative to the U.S. loan market and the leveraged exposure made available by using this type of structure presents "an attractive opportunity for European investors," said Inna Yulman, an analyst at Derivative Fitch.
The Chicago-based Deerfield had $13.7 billion in assets under management, including 24 CDOs, as of Aug. 1. Jonathon Trutter runs the 17-member bank loan team at Deerfield, which is responsible for the company's CLO and structured products groups. The group had nine CLOs under management and a total of $3.4 billion in assets under management as of August.
Calyon in late August brought what was called the first multi-managed MV CLO to market. Credit Agricole Asset Management is the senior manager to the 2.6 billion MV CLO issued by Confluent Senior Loan Opportunities. The deal has five sub-managers. Babson Capital Europe, an indirect subsidiary of Babson Capital Management, also closed its own MV CLO, the 625 million Rockall CLO, in June.
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