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Marathon gets more leeway over loan deterioration in next CLO

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Marathon Asset Management is issuing its 10th CLO in a $555.2 million deal that includes a slightly improved risk profile – but also plenty of allowances permitting Marathon to cope with any deteriorating credits.

Marathon CLO XI, which includes a $357.5 million triple-A tranche of Class A-1 notes, is planned as a senior-loan portfolio with cumulatively better underlying loan and recovery ratings than the $14.4 billion global credit asset firm’s previous CLO transaction issued last July, according to Moody’s Investors Service.

The new CLO also has a lower permissable bucket for covenant-lite loans and, according to Moody's presale report published this week, also disallows the addition of subordinate loans or loans from obligors located in emerging markets.

But in a series of credit challenges that Moody’s noted in a presale report issued this week, the CLO’s rules will permit some deterioration in the portfolio’s weighted average ratings factor (WARF) in post-reinvestment period trading. (WARF represents the value of the ratings of the loans held in the portfolio, with lower scores resulting from higher-rated loans in the pool.)

The deal also permits a higher-than-usual 15% concentration of debtor-in-possession loans, Moody’s reported, compared to 10% in Marathon CLO X. And in another change noted by Moody’s, Marathon can use principal proceeds (up to 5% of the initial par value of the deal) to exercise warrants allowing the issuer to obtain securities derived from workouts or restructurings of obligor loans in the portfolio (such as distressed-debt exchanges).

(CLOs otherwise cannot directly purchase securities and bonds for portfolios due to Volcker Rule restrictions.)

Another issuer-friendly term for Marathon CLO XI is a lower overcollateralization trigger level (121.6%) compared to Marathon’s previous issue (124.41%), providing more breathing room in maintaining a required minimum par value of the portfolio’s loans above the face value of issued notes.

The deal comes with a standard two-year non-call window and a five-year reinvestment period; the weighted average spread is 3.5% and the weighted average life is nine years.

The transaction, underwritten by Citigroup, is scheduled to close in March. Moody’s assumed a coupon of three-month Libor plus 115 basis points for the Class A-1 notes.

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