Jefferies Group is preparing a second collateralized loan obligation backed entirely by revolving lines of credit and delayed draw loans.
The securitization trust, JFIN Revolver CLO 2014, will buy the majority of its initial collateral from Jefferies Finance LLC, an entity affiliated with the manager, according to a presale report published by Standard & Poor’s. This pool of collateral will have maximum principal balance of U.S. $450 million; however, at the transaction's closing, the amount actually borrowed is expected to be approximately $25.00 million. As a result, the CLO will be required to fund the remaining $425.00 million if and when the borrowers require such funds. In the meantime, it will deposit these funds in a special account.
While the trust will not earn interest on the unfunded portion of the collateral, it will earn a commitment fee on this portion. S&P expects the weighted average commitment fee on the revolver and delayed-drawdown collateral obligations to be 0.50%. Nevertheless, this commitment fee is likely to be significantly lower than the amount of interest the issuer will have to pay the holders of the rated notes.
The issuer is expected to hedge the negative drag by entering into LIBOR hedges, creating an interest reserve account, and issuing class E notes as variable funding notes.
As of July 10, the issuer had identified 93.33% of the portfolio's collateral. Obligors in the transaction come from a variety of industries including publishing, healthcare, equipment leasing, lodging and casinos, food and drug retailers, financial intermediaries, electronics, and business equipment and services, according to S&P.
The trust will issue six tranches of notes, including a $256 million class A with a preliminary AAA’ rating from S&P that was marketed at three-month Libor plus 155 basis points. This class benefits from subordination of 51.05%.
The deal is non-callable until February 2016, with a reinvestment period also ending in February 2016—both shorter periods than other CLO deals on the market.
Jefferies previous revolver CLO was completed in December 2013. The firm manages a total of seven CLOs.