Neuberger Berman Loan Advisors is preparing to issue $399 million in a collateralized loan obligation (CLO) deal that will finance primarily first-lien secured leveraged loans.
Morgan Stanley is the arranger on the transaction, an arbitrage cash flow CLO that is slated to close in late July and that will have a reinvestment period of five years, according to Fitch Ratings.
Despite an average credit quality of ‘B’ on the indicative portfolio, which indicates a highly speculative credit quality, the market is accustomed to managing such risks, according to Fitch. The ‘B’ rating is in line with recent CLOs, and the notes will benefit from adequate levels of credit enhancements and structural features typically found in U.S. CLOs.
Fitch expects to assign ratings ranging from ‘AAA’ on both the $248 million, A-1 class and the $8 million, A-2 notes, which have credit enhancement of 38% and 36%, respectively, to ‘BBB’ on the $25.6 million, class D notes. The class D notes have enhancement of 25.6%.
All of the notes have a legal final maturity of July 2036.
Economic trade winds are currently filling almost every area of the market with foreboding, but Fitch believes that the cashflow to the notes will be a credit positive. According to its cashflow model replicating principal and interest waterfalls, the notes can withstand the following default rates:
- A-1—57.9%
- A-2—56.5%
- B—52.1%
- C—46.9%
- D—37.5%
All of the floating-rate assets reference the Secured Overnight Financing Rate (SOFR), and the trust stipulates that 95% of the assets must be floating rate. While the transaction has no hedges at closing, interest rate or foreign exchange hedges can be added after closing.
While the reinvestment period is five years, the transaction has a non-call window of two years.
The spread on senior ‘AAA’s is 183 basis points.
As for the portfolio profile, the maximum single obligor represents 2.5% of the pool, by balance, and the maximum single industry represents 15%. Covenant lite contracts represent 65% of the portfolio, at most.
