NewStar Financial is releasing its first CLO since September 2015 with a $350 million portfolio of loans it has originated for small to medium-sized companies.

NewStar Commercial Loan Funding 2016-1 LLC is the 13th collateralized loan obligation issued by the Boston-based lender, which has $6.9 billion under assets and manages nine CLOs.  

Moody’s Investors Service on Thursday issued ‘Aaa’ ratings on two Class A tranches. The Class A-1 tranche for $176.5 million is 50.7% of the portfolio capital structure with an anticipated coupon of three-month Libor plus 230 bps. A Class A-2 tranche sized at $20 million will have a 3.517% coupon. Both Class A notes have 43.9% subordination over the other asset classes.

The deal also includes $36.75 million in Class B notes rated ‘Aa2, with 33.4% subordination and an expected price of Libor plus 375 bps; a Class C notes structure totaling $22.5 million that is rated ‘A2’  with an assumed coupon of Libor plus 515 bps; and Class D notes rated ‘Ba3’ and size dat $23 million, with 13.6% subordination and a coupon of Libor plus 750 bps.

The equity tranche is $45.5 million, a 13.1% share of the structure. The CLO meets European risk-retention compliance standards that require at least 5% of the securitized exposure in the form of membership interests. The retention will be held by NewStar Commercial Loan Depositor 2016-1 LLC.

The CLO, which Moody’s says is similar in size and structure  to other recently closed CLOs issued by GC Investment Management LLC ($350 million) and Fifth Street Management LLC ($405 million), will have at least 90% first-lien secured loans backing the notes. It will be restricted to comprise no more than 10% second-lien or international loans, 5% of first-lien “last out” loans and can hold no more than 15% loans designated as covenant-lite. It is prohibited from carrying long-dated assets.

Moody’s reports that 83.5% of the loans in the portfolio belong to either ‘B2’- or ‘B3’ rated companies, which are on the lower-end of the ratings agency’s speculative-grade rating system. The top five industries representing 52.5% of the portfolio are banking, finance, insurance and real estate (13.6%); business services (11.9%); automotive (10.3%); beverage, food and tobacco (8.6%) and non-durable consumer goods (8.1%).

The CLO will have a four-year revinvestment period through February 2020, during which NewStar is permitted discretionary sales – other than during a restricted training period – that can be up to 30% of the portfolio’s par amount.

The CLOs average spread is 4.85%, the average coupon 7% and the average recovery rate is 46%.

The CLO’s overcollateralization trigger levels are adequate, with Moody’s reporting the event of default par ratio trigger is set at 102.5%, “well below” the initial level of 178.1%.  

Wells Fargo is the underwriter. 

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