Pramerica Changes Structure of European CLO

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Pramerica has adjusted the structure of a €300 million CLO it priced this month, presumably to reflect the fact that an unusually large portion of the collateral is in fixed-rate bonds, as opposed to floating rate loans.

Dryden XXVII Euro CLO 2013, which was underwritten by Barclays, requires the collateral manager to maintain a minimum concentration of 75% of senior secured loans or bonds and a maximum of 25% of non-senior secured loans or bonds.  While there is no specification for the split between loans and bonds, a presale report published by Standard & Poor’s says the split in the deal’s indicative portfolio is 37% bonds versus 63% loans.

By comparison, Cairn CLO II, which was the region’s first deal since the financial crisis, has a minimum allocation to senior secured loans of 90%.

Both transactions have a six-month window after closing to acquire their remaining assets; in the meantime, they incur negative carry, paying out more on the notes issued than they receive on the underlying pool of assets.

Having a bigger bond bucket allows Pramerica to ramp up its portfolio more quickly at a time when European lenders are making few noninvestment-grade commercial loans. By comparison, Europe’s high yield bond market has been much more active.

However, the high percentage of bonds in Dryden XXVII Euro CLO 2013 creates a potential mismatch between the fixed rate payments it receives on this collateral and the floating-rate payments normally made on CLO notes.  When the CLO priced, its senior tranche of ‘AAA’-rated Class A notes was split into two sub-tranches, one for €69 million that pays a fixed rate of 2.295% and one for €100.5 million that pays six-month EURIBOR plus 1.350%. The remaining tranches were all floating rate.

However, the capital structure has since been changed:  the B and C tranches are also split into two sub-tranches each, according to research published today by S&P. The ‘AA’-rated B tranche now consist of a €9.4 million sub-tranche paying 2.929% and a €21.6 million sub-tranche paying EURIBOR plus 1.9%. The ‘A’-rated C tranche now consists of an €11.6 million sub-tranche paying 3.929% and a €6.4 million sub-tranche paying EURIBOR plus 2.9%.

The deal also includes a €13 million ‘BBB’-rated tranche paying EURIBOR plus 4% and a €17.5 million, ‘BB+’-rated tranche paying EURIBOR plus 4.75%.

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