Guardian Life unit issued debut CLO in 2016; now it's refinancing

Guardian Life Insurance Co. issued its debut collateralized loan obligation two years ago. It was part of a wave of transactions from well-capitalized life and casualty firms that decided they would rather manage their own deals than invest in CLOs run by other managers.

Now Guardian Life is participating in another trend: It's refinancing the $406 million deal, which is managed by affiliate Park Avenue Institutional Advisers. And, like many CLO managers, Park Avenue is not only reducing interest rates on notes issued by the CLO, it is also extending the life of the transaction.

Once the refinancing closes, Park Avenue Institutional Advisers CLO Ltd. 2016-1 will have a two-year non-call period (through August 2020) and can be actively managed for up to five years (through August 2023), according to a presale report from S&P Global Ratings.

JPMorgan is underwriting the transaction.

Of course, funding costs will also be drastically reduced for all five tranches of existing notes. The replacement notes for the $250 million, triple-A rated Class A-1 tranche will be priced at Libor plus 120 basis points, versus 170 basis points originally. While that's a savings of 50 basis points, it's still wide of the industry average 113 basis point AAA spread reported by Thomson Reuters LPC for July.

The Class A-2 $39.6 million tranche (for which S&P maintains an AA rating) will pay Libor plus 180 basis points, a narrowing of 65 basis points; while the $35.8 million in Class B notes (rated A) will pay 223 basis points, a reduction of 122 basis points.

The Class C notes sized at $21.7 million (BBB-) have a reduced coupon of 306 basis points from 475, and the $15.7 million Class D tranche (BB-) now has a 585 basis point spread from the original 725.

The $42.95 million equity tranche, which was retained to satisfy risk retention requirements, is not being refinanced.

Moody’s Investors Service, which rated the senior tranche of the original deal, has yet to issue a report on the refinancing; it did not rate any of the subordinate notes at the time of issuance.

The transaction was the first by the Guardian Life affiliate after the company was part of a wave of well-capitalized casualty and life firms that christened new asset management arms to pool and securitize senior loans. Insurance firms have typically been investors in CLOs, but the introduction of U.S. risk retention requirements on CLOs had reduced the number of managers in the field two years ago. (Those skin-in-the-game requirements have since been rescinded through a federal D.C. Circuit Court of Appeals ruling in February.)

Last year, Park Avenue followed up with a second CLO transaction with its $450 million 2017-1 portfolio.

According to S&P, Park Avenue’s CLOs favor loans in sectors such as health care and diversified financial services.

The refinanced 2016-1 transaction will have a covenanted nine-year weighted average life and a weighted average spread of 3.3% between its blended payment rates to investors and the average 7.5% interest rate paid by the speculative-grade loan borrowers in the pool (which includes 145 unique obligors).