N.M. Rothschild and Sons’ Five Arrows Managers LLP has priced its first European CLO since November 2014, though closing of the deal has been extended by four days to April 26, according to Fitch Ratings.
Contego CLO III B.V. is a cross-border collateralized loan obligation that will issue €307 million (US$349.7 million) of notes backed by primarily senior secured loan and high-yield bonds denominated in both euros and other currencies. The AAA-stack totals €178.5 million, and has been priced at 153 basis points over the benchmark Euribor. The notes benefit from 40.5% credit enhancement.
The six classes of notes also include a €40.3 million equity tranche, or 13.43% of the total pool, which Five Arrows will hold onto in order to comply with risk-retention rules..
Fitch reports that loans and bonds backing Contego III – which originally was to close April 22, according to Moody’s Investors Service – have an average credit quality of ‘B,’ and none are rated below ‘B-’ by Fitch. Five Arrows Managers has identified €261 million, or 87.72%, of the portfolio’s assets thus far, consisting of 73 assets from 68 high-yield/speculative grade obligors. Over 98% are senior secured.
The portfolio has industry concentrations in healthcare (18%), business services (12.6%) and broadcasting/media (6.35%).
Contego contains special provisions allowing it to build up to 10% of its assets in countries with sovereign debt ratings below ‘AAA’ ratings, such as Spain or Italy. Contego can invest in non-Euro assets provided that Five Managers hedges against the currency risk.
Contego is also constructed to allow for investments from U.S. banks: some of the senior notes are “non-voting,” that is, holders do not have the right to replace the CLO manager, which could be construed as conferring ownership rights. That’s important because, under the Volcker Rule, U.S. banks are prohibited from having an ownership interest in funds that rely on an exemption to the Investment Company Act of 1940. CLOs can avoid being designated as a “covered fund,” or subject to this restriction, only if they restrict their holdings to loans and avoid bonds and other securities.
By providing non-voting or exchangeable non-voting notes to U.S. investors, the CLO manager makes it possible for bank to invest in the senior securities of the deal despite the fact that it has some bond holdings.
Contego III was arranged by Deutsche Bank.
Five Arrows Managers is a UK subsidiary and the CLO sponsorship arm of Rothschild’s merchant banking division. Rothschild has been actively managing CLOs since 2007.
Contego III is Rothschild’s first CLO issuance since November 2014.