Octagon Investment Partners’ new CLO is its first leveraged loan collateralization since September, as well as its debut portfolio being acquired last November by global insurance asset firm Conning.
Octagon Investment Partners 26 is a $507 million securitization that includes a $310 million, AAA-rated Class A tranche that is priced at Libor plus 158 bps. Octagon 26 is a typical CLO structure with 92.5% of its assets in first-lien senior secured loans, with two-year noncall and 4.5-year reinvestment periods.
Moody’s Investors Service and Standard & Poor’s have issued preliminary ratings on the Class A notes. Moody’s introduced ratings to the subordinate tranches, including ‘Aa2’ to a pair of Class B notes that carry 12.8% of the capital structure. The B notes are divided between a floating rate $50 million tranche priced at Libor plus 250 bps; and a $15 million fixed-rate tranche with a coupon of 4.15%.
The Class C, D, and E notes totaling $85 million are deferrable, and have Moody’s ratings of ‘A2’, ‘Baa3’ and ‘Ba3’, respectively.
Presale reports from Moody’s and S&P did not note whether the CLO will meet forthcoming risk-retention requirements, but the portfolio includes an unrated equity tranche of $47.7 million, or nearly 10% of the notional value of the notes to be issued when the CLO closes in mid-April. The CLO is the first pieced together by Octagon since its October sale to Conning, a merger driven by Octagon’s pursuit of capital to back its risk-retention needs for forthcoming U.S. regulations requiring CLO managers to maintain a minimum 5% stake in the value of marketed portfolios.
Octagon has identified $452.8 million of the collateral in the CLO pool. The loans in the pool contain and average weighted maturity of 6.21 years, an average rate weighting of ‘B+’ (S&P) and ‘B2’ (Moody’s), and an average weighted spread of 4.07% (4.35% including Libor floors). Over 45% of the loans in the pool are with ‘B’ rated companies, with a targeted maturity date of 2023.
The CLO will be restricted from long-dated assets, and can hold no more than 7.5% in ‘C’-rated assets, 7.5% in debtor-in-possession loans, 5.75% in second-lien/unsecured, and 20% international holdings.
The CLO will have a strong mix of loans from 144 identified obligors, which nearly half among five industries: the healthcare and pharmaceuticals industry (12.1%); high tech (10.3%); business services (9.4%); gaming/leisure (9.3%) and media broadcasting (7.2%). The portfolio will have a relatively high ceiling on cov-lite loans, with an allowance of up to 75% in the pool.
Octagon 26 will carry a minimum overcollateralization cushion of 123.33% on the Class A and B notes.
The CLO is the first Octagon has pieced together since last September when it issued $589 million in floating rate notes through Octagon Investment Partners 25. Moody’s used three 2014 Octagon CLOs to make transactional comparisons, noting that the size of Octagon Investment Partners XXII, XXI and XX (the company no longer uses Roman numerals in its CLO vehicles) were all in excess of Octagon 26’s notional value. Octagon 26 also carries slightly higher risk that those 2014 deals, with an average Moody’s weighted average rating factor (WARF) of 2850. WARF measures the balance of the underlying loan ratings in a portfolio by assigning a numerical representation of a rating (with higher numbers designating lower ratings, such as 1350 for a ‘Ba2’ or 2250 for a lower ‘B1’ rating).
Octagon 26’s size and WARF ratings, however, is on par with recent peer group CLOs issued last December: BlackRock’s $500 million Magnetite XVI and American Money Management Corp’s $350 million AAMC CLO 17.
Octagon Investment Partners now rates 17 CLOs, and has $12.7 billion in total assets under management involving CLOs, senior loans, high-yield bonds and structured-credit assets. The company was founded in 1994 as a unit of Chemical Bank, and had previously spun in 1999 from Chase Manhattan (whose eight-sided logo inspired the company’s name).