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S&P downgrades a subordinate tranche of two Halcyon CLOs

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S&P Global Ratings on Tuesday downgraded a subordinate tranche of CLOs managed by Halcyon Loan Advisors that is struggling with distressed and defaulted assets.

The ratings actions “reflect changes to the overcollateralization ratios, credit support, and exposure to 'CCC' rated assets, among other factors,” the rating agency stated in its report.

The downgrades were accompanied by five upgrades and four grade affirmations of more senior notes in the two deals due to paydowns — which in one of the deals was accelerated by the diversion of subordinate-note interest payments because of the credit deterioration, according to a release from S&P.

The new ratings were issued just a week after the manager’s parent firm, Halcyon Capital Management, appointed a new chief executive, Jason Dillow, welcomed additional minority investments and renamed the $10 billion-asset global investment firm Bardin Hill Investment Partners.

S&P lowered the non-investment-grade ratings of the Class D notes of Halcyon Loan Advisors Funding 2012-1 by three notches, to B from BB; it also downgraded to the same class of Halcyon Loan Advisors Funding 2013-1 by one notch, to BB- from BB.

The ratings deterioration was driven partly by the buildup of CCC-rated and defaulted asset concentrations within the ongoing post-reinvestment period for each, according to S&P. The CCC bucket in Halcyon 2012-1, for instance, takes up 14.8% of the remaining portfolio that has only 51 remaining loan obligors. The exposure includes distressed assets that have incurred par losses.

Neither Halcyon 2012-1 nor 2013-1 was ever refinanced, according to ratings agency reports.

S&P cited a September trustee report showing the Halcyon 2012-1 deal breached both its Class D overcollateralization test and minimum interest-coverage tests, forcing the diversion of interest proceeds due the notes to pay principal instead on the Class A-1 notes.

The added waterfall and accelerated $74.28 million paydown of the triple-A Class A notes in 2012-1 since last November left the balance of the senior notes only 7.29% of the original $230 million balance from August 2012. That has sharply raised the overcollateralization level on the Class A, B and C notes — enough to upgrade the 2012-1 deal’s Class B notes two notches to AA+ from AA(-).

Four classes of notes were upgraded on the Halcyon 2013-1 transaction, including the Class A-2B and A-2C notes jumping to AAA from AA, the Class B notes jumping to AA+ from single A, and the Class C notes moving to a BBB rating from BBB(-), according to S&P.

S&P stated the cash flow in the deal was enough to sustain the former Class D as well as support a Class C upgrade, but that was countered by the combination of higher CCC-rated asset exposure, growing distressed debts and a declining weighted average spread on the portfolio to 3.97% from 4.58% since last November.

Last week, Halcyon Capital Management announced it was changing its name to Bardin Hill following a new minority stake investment from TPG Sixth Partners as well as an expanded minority investment from Dyal Capital Partners, a division of Neuberger Berman Group.

Additional equity was also acquired by the firm’s existing management, including Dillow.

Dillow will retain his CIO post as he replaces retiring chairman and CEO John M. Bader in fulfilling a longstanding succession plan, Dillow said during a CNBC interview last week.

In September, Halcyon brought aboard Philip Raciti as portfolio manager and head of U.S. performing credit, reporting to Dillow and Brian York, the firm’s global performing credit portfolio manager and head trader. Raciti is a former managing director and portfolio manager at CVC Credit Partners.

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