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THL Credit extends reinvestment period in 2nd MM CLO

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THL Credit’s second middle-market CLO will come with a longer reinvestment period and a wider senior-note spread than its debut deal from March.

THL Credit Lake Shore MM CLO II, to be managed by the THL Credit Advisors EU LLC affiliate, is a $305.5 million collateralized loan obligation transaction that will initially include partial interests in 130 first-lien loans from 108 middle-market firms.

Unlike the two-year reinvestment period of its first deal this year, this deal will have a more typical 4.1-year period in which the manager can buy and trade assets as needed to improve the portfolio’s credit metrics.

The deal also has a two-year noncall with an expected weighted average life of eight years.

The Class A-1 notes totaling $168 million have a price spread of 180 basis points over Libor, wider than the 170-basis-point spread on THL’s first MM deal. The new transaction includes a “junior” triple-A offering as well: a $10 million tranche with a fixed 3.597% coupon.

THL’s launch of a middle-market CLO platform this year follows other recent efforts by firms like THL which has built direct lending businesses to smaller corporate borrowers with investments typically between $5 million and $25 million. Boston-based THL Credit Inc. (Nasdaq: TCRD) is a business development company with approximately $16.8 billion in assets under management.

According to Fitch Ratings, THL Credit has included “fallback” language to replace the Libor benchmark rate should Libor rates become unavailable during the life of the deal.

Fitch’s presale report indicated that manager has baked in several alternative options should global Libor benchmarks cease publication after 2021, as expected.

THL will be permitted to switch to an index that has been used by at least 50% of new-issue or refinanced/reset CLOs the prior three months, or to an index used by at least half of the underlying loan assets it holds.

THL may also switch to a rate that has been recommended by trade organizations, the report stated.

Some asset-backed and structured-credit issuers have opted to adopt fallback language recommended by an industry working committee convened by the Federal Reserve Board and the New York Fed. That recommendation is for a planned future term rate that will be based on the New York Fed’s Secured Overnight Financing Rate.

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