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Oaktree repacks 2019-1 CLO in new kind of 'combo' notes

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Oaktree Capital Management is jumping through some hoops to make the most subordinate securities issued in its most recent CLO attractive to more investors.

Collateralized loan obligations sometimes combine the most subordinate tranche of securities they issue, which pays no interest and is unrated, with a more senior tranche of securities that is rated. This creates new securities with characteristics of both classes that can be marketed to investors prohibited from buying unrated securities.

Oaktree is doing something slightly different; earlier this month it went to market with its next CLO, the $743.2 million Oaktree CLO 2019-1, which contained tranches of securities with ratings from S&P Global Ratings ranging from AAA to BB- and a tranche of unrated notes (also known as the "equity").

This week it launched a second transaction, the $155.7 million Oaktree 2019-1T Secured Note issuer Ltd., consisting of a single class of notes backed by a combination of the Class C, D, E and subordinated tranches issued by Oaktree CLO 2019-1 and approximately 60% of the equity tranche of Oaktree CLO 2019-1.

S&P expects to assign a BBBp rating to the repackaged notes; the "p" denotes the fact that the notes are not expected to have a coupon, but instead receive only proceeds from the interest payments of the multiple underlying notes and equity during the expected five-year reinvestment period.

By combining the three rated tranches and $33.8 million of the $55.01 million of unrated equity, Oaktree created an investment-grade security that still provides the high-yield-type returns expected in the equity and lower-rated tranches of a CLO.

Because the majority of the equity is included in the combo notes, S&P stated in a press release, combo note holders will have the voting authority (with manager’s consent) to direct whether or not the combo notes can be refinanced and repriced after the CLO’s noncall period of two years.

“In most cases, the combination note are expected to be unwound following any such refinancing or repricing, and the combination noteholders would receive the underlying components,” according to S&P’s release.

In a March 15 presale report for Oaktree CLO 2019-1, S&P said it expected to assign ratings of A to the $48.75 million Class C tranche (paying a coupon of Libor plus 275 basis points), BBB- to the Class D notes totaling $45 million with rate of Libor plus 380 basis points, and BB- to the $28.13 million Class E tranche paying out at 680 basis points over Libor.

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