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Octagon Credit Investors, GoldenTree kick-start 2019 CLO market

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GoldenTree Asset Management and Octagon Credit Investors are launching what appear to be the first new collateralized loan obligation and first CLO refinancing, respectively, of 2019.

Market participants have been waiting to see whether the spreads on new-issue CLOs would continue to widen in the first quarter, but Fitch's presale report on the $757 million GoldenTree Loan Management US CLO 4 does not indicate where the deal's senior tranche of AAA rated notes is expected to price.

The average spread on AAA rated new-issue CLO securities in December was 121 basis points over Libor, according to Refinitiv. That was the widest mark since September 2017, when the average was Libor plus 123 basis points. A year ago, in January 2018, the average had narrowed to Libor plus 106.4 basis points.

GoldenTree’s new CLO has a 5.1-year reinvestment period and is noncallable for 2.1 years. At closing, the manager expects to have acquired 93.2% of the collateral, consisting of 142 loan assets from 138 speculative-grade corporate borrowers.

Fitch Ratings reports the portfolio has a weighted average life of 5.8 years.

The deal will be managed by GoldenTree’s affiliate, GoldenTree Loan Management, which was formed in early 2017 to manage CLOs to be constructed for dual compliance with risk retention regulations in both the U.S. and within the European Union. The U.S. risk-retention rules have since been vacated through a federal appeals court ruling in February 2018.

The new deal still meets EU risk-retention standards, with GLM expected to hold skin in the game by holding the full $52.5 million tranche of subordinate notes.

In the $791.5 million reset of Octagon Investment Partners XXI, which was originally issued in 2014, the replacement senior notes pay 130 basis points over three-month Libor. The deal was previously refinanced more than two years ago. The reset will extend the deal with a new 4.8-year weighted average life, according to Fitch Ratings.

Through the reset, Octagon lowers the AAA coupon by five basis points from 135 basis points on a $450 million Class A-1A-RR tranche. The old rate was arranged through a November 2016 partial refinancing, which had lowered the senior-note tranche’s original coupon spread of 147 basis points.

The capital stack also has a $37.5 million Class A-1B-RR tranche that is also triple-A rated, with an interest rate of 165 basis points over three-month Libor.

The new portfolio has a five-year reinvestment period and two-year non-callable period.

The deal is highly diverse with 334 loans and 302 high-yield obligors in the fully ramped portfolio. According to Fitch, 52.7% of the underlying borrowers have an established credit rating or credit opinion. Fitch estimates 4.9% of the portfolio consists of the highest-risk loans that are rated CCC or lower. The highest industry concentrations are in telecommunications (12.9%), computer/electronics (12.7%), gaming/leisure (9.8%), health care (8.9%) and business services (7.9%).

Octagon’s deal picks up the manager’s 2018 momentum, in which the firm printed five new deals totaling $2.9 billion, as well as refinancing/resetting eight other deals. Octagon entered 2018 with 22 U.S. deals under management with $13.2 billion in outstanding CLO debt securities, according to Fitch.

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