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GSO/Blackstone marks debut middle-market CLO

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GSO/Blackstone is launching its first-ever middle-market collateralized loan obligation, centered on the planned $10 billion relaunch of parent Blackstone Group’s direct-lending business aimed at small/medium enterprise businesses.

Diamond CLO 2018-1 is a $502.04 million transaction; it is backed by middle-market and broadly syndicated speculative-grade senior secured term loans, according to presale reports from Fitch Ratings and S&P Global Ratings.

The senior tranche of $277.5 million Class A-1 notes have an assumed coupon of 127 basis points over Libor.

The deal is Blackstone’s (Nasdaq: BX) first securitization of middle-market loans since it announced it was restarting a new direct-lending business this spring, seven months after ending a subadvisory partnership with FS Investments (Nasdaq: FSIC) involved in middle-market loans for businesses that are typically held by private-equity interests and have less than $50 million in annual earnings.

“We’re rebuilding our direct-lending [assets under management] base, both the institutional and retail channels, and expect significant growth over the coming quarters,” Blackstone Chief Executive Steve Schwarzman said in the company’s July 18 second-quarter earnings conference call.

The Diamond CLO transaction has a capital structure that includes five additional bond tranches, including a Class A-2 senior tranche totaling $32.5 million that is also rated triple-A by S&P and priced at 150 basis points over Libor.

S&P also assigned ratings ranging from AA to BB- for the remaining tranches.

Fitch did not issue ratings on the A-2 bonds nor the remaining four classes of subordinate notes in the capital stack of the debut portfolio. The partial ratings coverage is similar to Blackstone’s recent Myers Park broadly syndicated-loan portfolio, in which S&P did not rate the senior subordinate A-2 tranche that received an AAA from Fitch.

The transaction has an unusually short duration: The 1.4-year reinvestment period through December 2019 is on top of a short one-year non-call period. The deal’s weighted average life is 3.6 years, with a maximum six-year maximum WAL.

Blackstone’s $10 billion commitment to ramp up nonbank lending to nonrated or speculative-grade firms mirrors the trend of other private equity firms joining the direct-lending fray. In April, KKR (NYSE: KKR) teamed with FS Investments – the former Blackstone partner – to create a business development company (BDC) platform seeded with $18 billion in joint committed capital.

Ares Management (Nasdaq: ARES) raised a whopping $10 billion in committed funds during the second quarter for its direct-lending plans, and the Carlyle Group (Nasdaq: CG) is expected to raise billions this year for a direct-lending business line that has been a primary focus for more than two years (the company is currently refinancing a 2015 CLO forged with its direct-lending originations).

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