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KKR gains asset treatment flexibility in its next $506M CLO

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KKR Financial Advisors’ next collateralized loan obligation gives the manager more leeway in the treatment of troubled loan assets, according to a presale report from Moody’s Investors Service.

That came at the expense of slightly higher funding costs, at least on the subordinate tranches of notes issued in the deal.

KKR 23 CLO, the fourth new-issue CLO by the manager in 2018, is a $506.3 million transaction with six tranches of debt securities headed by a $305 million AAA notes class with a price of 115 basis points over three-month Libor, according to the presale report, which was published Friday. That's unchanged from the Class A-1 notes for KKR 22 CLO, which was printed in June. However, spreads on the three subordinate classes (Class B, C and E) of notes are slightly wide of the rates KKR negotiated with investors for the earlier transaction.

The non-issued subordinate notes totaling $46.3 million represent the ownership equity portion of the deal (notes which only receive residual principal and interest payments).

Moody’s noted some credit challenges to the deal that were not part of the prior transaction. An obligor bankruptcy, for instance, won’t result in assets being treated as defaults until 60 days after the bankruptcy proceedings were instituted.

The manager is also permitted to repurchase notes from investors without being required to maintain “then-current” subordination levels, as well as treat a debt instrument as a current-pay asset “if the rating was Caa2 immediately prior to withdrawal.”

KKR also has broad discretion to amend deal terms without investor consent, which was a feature of KKR 22.

The obligor pool is weighted more heavily in the B3 rating category (one notch above triple-C ratings status) at 44.6%, versus 39.5% in KKR 22.

KKR Financial Advisors is a wholly owned subsidiary of the global investment firm KKR &Co., which has approximately $191.3 billion in assets under management.

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