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Octagon's first new-issue CLO of 2019 has lower 'cov-lite' cap

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Octagon Credit Investors' first new-issue CLO of 2019 has slightly lower exposure to "covenant-lite" loans than its previous deal issued in 2018.

The the $505.75 million Octagon Investor Partners 40 limits “covenant-lite” loans to 60% of its portfolio, below the 65% cap on it's previous new-issue deal, the $611 million Octagon Investment Partners 39, completed in November.

Recent peer deals have had cov-lite allowances of up to 95% of the pool. Such allowances permit managers to acquire loans in which borrowers have sidestepped lender restrictions on additional borrowing, or lack minimum interest coverage ratios; cov-lite loans also may lack lender stipulations that borrowers apply free-cash flow sweeps into paying down principal.

Octagon Investment Partners 40 will price at 133 basis points on its triple-A rated $307.5 million senior-note tranche, according to presale reports from Moody’s Investors Service and S&P Global Ratings.

The new deal will bring the firm’s CLO assets under management to $16.1 billion through 26 outstanding transactions. As of the third quarter in 2018, Octagon ranked eighth among U.S. CLO managers in total volume outstanding.

The portfolio has a five-year reinvestment period and is non-callable for two years. The weighted average spread on the assets is 3.5%, which is 1.58 percentage points more than the weighted average spread on the securities to be issued. Both metrics in line with the three-month average for recently issued CLOs, according to S&P Global Ratings.

S&P and Moody’s Investors Service modeled a nine-year weighted average life to the deal.

Although Octagon has identified 87.7%, or $438.66 million, of loans it plans to use as collateral, it had only acquired 49% at the time of the cutoff date for the ratings agencies’ reviews.

Most of the loans in the portfolios (over 45%) are ared single-B, with the largest obligor exposure in the software and hotel/restaurant/leisure sector.

Similar to recent deals by the sponsor, Octagon Investment Partners 40 has a weighted average ratings factor (WARF) that places it among the best 20th percentile of U.S. CLO credit quality rated by Moody’s Investors Service.

The deal’s WARF of 2719 is “significantly below average” for higher deals whose higher WARF scores indicate a larger contingent of lower-rated speculative-grade loans, according to Moody’s. (WARF figures average the ratings score applied the individual loans in a portfolio based on a loan’s debt rating, with lower numbers assigned for higher ratings).

The new-issue transaction follows last month’s reset of the manager’s $791.5 million 2014-vintage Octagon XXI.

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