PPM Loan Management Company has launched a $350 million typical cash-flow CLO transaction.
In its Oct. 15 presale report, Moody’s Investors Service describes a deal with seven tranches, starting with a $210 million Aaa-rated portion that has effective subordination of 40% and an assumed coupon price of three-month Libor plus 1.42%. The Ba3-rated, $15.6 million in E Notes, at the bottom of the rated capital stack, have effective subordination of 9.3 and expected to price at three-month Libor plus 8.04%
PPM is retaining a $36.5 million subordinated portion.
Moody’s describes a handful of the deal’s credit strengths, including its requirement to hold at least 92.5% in first-lien senior secured assets, and its prohibition on purchasing long-dated assets that reduces the risk of PPM having to liquidate assets remaining at the CLO’s maturity date.
Further strengths according to Moody’s include a remote likelihood of an over-collateralization-based event of default, a prohibition on note holders from surrendering their note without receiving payments, and provisions helpful to minimize the risk a creditor could force the issuer into bankruptcy.
The credit agency lists only one credit challenge: A provision that could worsen a failing collateral quality test by loosening other collateral quality test thresholds.
Moody’s also notes that the PPM deal’s “metrics are better than the median levels of CLO 2.0s” it has rated from 2010 until Sept. 30, 2020. For example, the rating agency notes that the deal’s weighted average rating factor (WARF) is low compared to peers, an indication of stronger credit quality.
Other metrics indicate a significantly above average recovery value on defaulted assets; PPM CLO’s allowance for riskier second-lien loans is significantly below average; and managers will have more flexibility to trade while staying in compliance with its collateral quality tests.
