Middle market lender Madison Capital Funding is preparing its first collateralized obligation of the year.
The $302.845 million deal, dubbed MCF CLO V, will be at least 95% backed by senior secured loans to small and medium-sized companies, at least 90% of them based in the U.S., Canada or the U.K., according to Standard & Poor’s.
The transaction will be collateralized by at least 95.0% senior secured loans, with a minimum of 90.0% of the loan issuers required to be based in the U.S., Canada, or the U.K. A maximum of 10% of the loans in the collateral pool can be covenant-lite. At least 5.5% of the collateral has credit ratings from S&P and 4.8% has recovery ratings from S&P.
S&P has assigned a preliminary AAA to the senior notes, which pay a spread of 190 basis points over three-month Libor. The notes benefit from 172% overcollateralization and 42.71% subordination.
The transaction cannot be called for two years, and Madison can actively manage the portfolio for four years, if the deal is not called.
Wells Fargo Securities is the initial purchaser.
S&P’s presale report does not indicate how Madison will comply with rules that took effect at the end of December requiring CLO managers to keep “skin in the game” of deals, but middle market lenders generally issue CLOs using loans already on balance sheet. So it’s likely that Madison is holding the riskiest slice of the deal directly on its books.
In comparison, managers of CLOs backed by broadly syndicated corporate loans generally use proceeds from issuance of their deals to acquire loans in the primary and secondary market. Most have little money of their own to put to work, and as a result many have raised money in separate funds to hold the retention stake.
Madison, a unit of New York Life Insurance Co., has two other CLOs, both of them issued since the financial crisis, and $710 in related assets under management. Its total assets under management, including non-CLO assets, total $8 billion.