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Pretium's first 2019 CLO given wider allowance for bankruptcy exchanges

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Pretium Credit Management is sponsoring its first CLO of the year – one that has a lower share of weaker-rated leveraged loans in the pool but an elevated allowance for bankruptcy-exchange assets.

The $435.5 million Crown Point CLO 8 is a broadly syndicated collateralized loan obligation that has a “significantly below average” weighted average rating factor (or WARF) of 2678, indicating a portfolio with a greater share of safer leveraged loans than other CLOs. (The WARF figures is a cumulative equivalent rating of between B1 and B2 ratings from Moody’s Investors Service.)

WARF is a cumulative numerical representation of a portfolio’s credit risk, with each rating assigned a value that is larger for lower-rated assets. A triple-A rating, for example, has a Moody’s rating factor of 1, but a speculative-grade B2 rating is 2720. Higher WARF figures indicate greater proportions of riskier loan collateral.

Amogn Moody’s risk concerns is that the portfolio will also carry a higher-than-average portfolio cap of 25% of bankruptcy exchange assets, which managers can substitute for other distressed/defaulted debts. Typically CLOs are limited to 10% on bankruptcy exchanges.

“To be sure, we consider bankruptcy risk to be the ability to substitute one defaulted security for another,” Al Remeza, a Moody’s associate managing director for U.S. structured credit new ratings, said in an email. “Sometimes bankruptcy exchange is misnamed and broader in scope because it additionally permits 'credit risk' securities, which are subjectively determined by the manager, to be swapped for other 'credit risk' securities. Such provisions are uncommon and anything greater than zero would be a potential credit concern in our analysis.”

Crown Point is expected to price at 139 basis points over three-month Libor for the $292.5 million Class A tranche with a preliminary Aaa rating from Moody’s. The deal has a two-year noncall period and a five-year reinvestment period in which Pretium can buy and sell assets to maintain or improve on the portfolio’s par value.

Pretrium Credit Management is a unit of Pretium Partners, and was formerly Valcour Capital Management. As of March 31, Pretium managed six CLOs with assets under management of $5.7 billion.

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