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Oak Hill's 1st CLO of 2019 includes fixed-rated notes

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Oak Hill Advisors' first collateralized loan obligation of the year offers a mix of fixed and floating-rate notes, according to rating agency presale reports.

CLOs are backed by floating-rate loans, and they typically issue notes pegged to the same benchmark, currently Libor. They were extremely attractive when prevailing interest rates were rising, but have lost their allure with some investors now that the Federal Reserve appears to be on hold. Offering fixed-rate securities could help restore this appeal, though it typically comes at a cost.

Other managers issuing fixed-rate notes in CLO portfolios this year include GSO/Blackstone, AIG, Wellfleet Credit Partners, CarVal CLO Management and SoundPoint Capital Management.

The $603.5 million OHA Credit Funding 2 will issue nine tranches of notes, including three tranches of triple-A rated Class A notes, some of them fixed-rate and some of them floating-rate, totaling $381 million. The Class A-1 notes pay Libor plus 132 basis points, according to a presale report form S&P Global Ratings; the Class A-2a notes pay Libor plus 165 basis points, while the Class A-2b bonds have a fixed 4.2% interest rate.

There is also a $3 million tranche of triple-A rated Class X notes that provides first-position interest proceeds for a low rate of 1% over Libor, with the principal waterfall coming after interest payments to the Class A-1 and A-2 notes, according to presale reports.

Four mezzanine notes totaling $162 million are all floating-rate, as is an unusual $9 million Class F tranche of single-B rated notes paying Libor plus 750 basis points.

The most subordinate tranche, known as the "equity" because it is entitled to whatever proceeds are left after paying interest and principal on more senior classes of securities, totals $42.5 million.

The deal is highly leveraged with a debt-to-equity ratio of 13.13x on assets already acquired for the pool, compared to a three-month average of 9.49x for open-market CLOs rated by S&P. However, the deal only had $380 million (or 63.4%) of the target $600 million lined up so far with 128 obligors, at the time S&P evaluated the deal. So the overall leverage could increase or decrease, depending on the additional assets acquired.

Oak Hill is coping with a higher weighted average cost of debt of 1.92% to acquire the loans for the pool, compared to 1.78% for other CLOs issued since the fourth quarter.

The deal cannot be called for the next two years, and will have a five-year reinvestment period in which it can parlay proceeds from note payments and asset sales into new loans to improve the credit equality of the pool.

The OHA deal allows up to 95% of the loans to be “covenant-lite,” or lacking financial or maintenance restrictions placed by lenders governing, for example, restrictions on additional debt from another lender, or minimum debt and interest-coverage standards.

Ratings agencies will apply lower recovery rates to cov-lite loans within CLO pools, reducing the overall recovery prospects for the pool of speculative-grade loans.

Oak Hill manages 19 CLOs with total assets of $9.2 billion; they account for nearly one-third of the total $32.6 billion in assets under management in leveraged loans, private credit and other distressed-debt strategies. Oak Hill also acquires debt and equity tranches of CLOs managed by other firms.

The transaction is the second on Oak Hill’s Credit Funding platform. Last August the firm issued OHA Credit Funding 1, a $501.75 million transaction.

The firm has not issued a CLO on its OHA Credit Partners platform since December 2017.

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