GSC Group recently announced the close of its 13th CDO fund since April 2000. The GSC CDO VIII, LTD is a $350 million collateralized loan obligation that will invest 30% in middle-market loans and 70% in broadly syndicated leveraged loans. The strategy stems from tight pricing in the market, particularly on broadly syndicated deals. The low spreads have made it hard to continue investing in some of these transactions with smaller buckets while still securing a satisfactory yield.
"Given how broadly syndicated loan spreads have tightened, we needed a more efficient vehicle to purchase these types of loans," said Seth Katzenstein, managing director at GSC Group. "In order to do so, we needed a fund with an emphasis on the broadly syndicated loans."
While GSC's U.S. collateralized corporate debt group has traditionally allocated 50% to 70% of funds to middle-market loans, Katzenstein said, spread compression on broadly syndicated transactions led the firm to widen the new fund's bucket for larger deals in order to compete.
"Broadly syndicated spreads have tightened so much that our existing vehicles did not have an efficient enough capital structure to actively participate in the higher-rated broadly syndicated transactions," Katzenstein said.
"Unfortunately, we were forced to decline opportunities that were attractive because they did not provide a commensurate return for our investors; in this new vehicle, that is not the case." The firm's U.S. collateralized corporate debt group had $4.9 billion under management as of Dec. 31, 2006, consisting of $2.3 billion in middle-market loans, with the remainder made up of broadly syndicated loans and high yield bonds.
Since broadly syndicated CLOs tend to have more leverage and lower liability pricing, the firm tailored this fund accordingly. While the vehicle is not structured to invest in fixed-rate notes, GSC does have the capacity to purchase some senior-secured floating-rate notes.
"We wanted as efficient a capital structure as possible to purchase broadly syndicated loans, and if you have bond baskets, you can get penalized by the ratings agencies," Katzenstein said. That means no "run-of-the-mill" high yield bonds.
Sizing down
The fund is on the smaller side for GSC Group, whose CDOs have typically ranged from $400 million to a little more than $600 million. The firm's GSC Gemini Fund, Ltd, which closed in August 2002, clocked in at $633.2 million, and its GSC European Mezzanine Fund II, L.P., which closed in April 2005 and which is one of three European funds, settled at $757.8 million.
However, the smaller scale is not due to lack of commitments. "We picked a smaller size so we could get a quicker execution for the transaction," Katzenstein said. While he could not comment on the book, the fund was very well received, he said.
Citigroup underwrote the transaction, which was 80% invested as of March 29. The firm chose this bank in particular because of its solid platform and because GSC had not worked on a deal with Citigroup for a while. "We thought that Citigroup was well positioned to help us with our objective," Katzenstein said.
Individual attention
Going forward, GSC will continue to invest the remaining 20% of the fund during the six-month ramp-up period, and the firm anticipates being fully invested before that period ends.
The firm does not have any current plans to hone in on specific sectors or avoid others in its upcoming investments. Instead, GSC said it would focus on each company, individually. "We will look at all sectors, and it really comes down to the individual credit metrics and profile of the investment opportunity," Katzenstein said.
GSC has more than $22 billion in assets under management. The firm focuses on investment opportunities in corporate credit; equity and distressed investing; and real estate. GSC is headquartered in Florham Park, N.J. and has offices in New York, London and Los Angeles. The firm's collateralized corporate debt group will manage the new fund; the group currently has approximately $6.7 billion in CDO and CLO assets under management worldwide.
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