At the onset of CDO troubles this past summer, market participants predicted that tough times would weed out the established players from the fly-by-night shops. As the CLO market begins to pick up, it appears the predictions might be coming true.
Nearly all CLOs that have priced since the summer were from managers who had previously issued four or more prior deals, said Barclays Capital in a recent report.
Managers pricing CLO deals last quarter included Babson Capital, which manages more than 50 CDOs totaling more than $21 billion in assets (as of Dec. 31, 2007); Highland Capital Management, with approximately $38 billion in assets under management; and other strong players such as The Blackstone Group and American International Group (AIG).
"Managers with a solid track record are currently the only ones able to push deals through the market," a CLO analyst said.
Another established player with $10.3 billion in leveraged finance assets, The Carlyle Group, announced the final close of two funds this month. These are Carlyle Strategic Partners II, a $1.35 billion fund to invest in distressed debt-including bank loans, public debt and public and private equity-and Carlyle Credit Partners Financing I (CCPF I), a $450 million CLO.
CCPF I is the firm's 10th CLO. The transaction has a traditional CLO structure with AAA', AA' and BBB' rated liabilities. Pricing on these tranches is at Libor plus 85 basis points, 250 basis points and 450 basis points on the tranches, respectively, according to JPMorgan Securities, which structured the fund and served as the placement agent.
At closing, CCPF I was 90% invested in first-lien, high yield bank loans. It will finance them with 12-year debt with no mark-to-market pricing triggers, said Michael Zupon, managing director and head of the U.S. leveraged finance team at Carlyle. A minority portion of the transaction is invested in covenant-lite loans.
While the portfolio is diversified, the fund is less bullish on sectors including financial institutions, retail, automotive and airlines.
CCPF I closed after roughly only a month of marketing, largely because the triple-A's were spoken for when the transaction launched. At the same time, Carlyle and its clients purchased the triple-B's, which left only a small dollar amount to be marketed, Zupon said, noting that this piece was oversubscribed. "This is a good time to own high-yielding, discounted loans," he said.
Separately, the firm recently started marketing a $500 million cash flow CLO called Carlyle High Yield Partners 2008-I, which is being arranged by Deutsche Bank Securities. The firm could not comment on the fund or future CLO issuance.
Some CLO market participants do not consider all of the deals coming to market new transactions, but basically the transfer of internal risk. Some of the CLOs recently pricing are funds of repackaged leveraged loans that managers have been holding on their books, said one CLO market participant.
Many of them are holding the triple-A paper because of lack of market appetite. In this case, it makes sense to have a good brand "because when you are keeping it on the book, you are thinking about selling it a couple years down the road," the market participant said.
Among other transactions currently in the market from well-established managers is Allos Synthetic CLO 2008-1 from Trust Company of the West, which is being arranged by Citigroup Global Markets. Initial price talk is at 125 to 150 basis points on the triple-A paper and 425 to 450 basis points on the single-A paper, according to a report by JPMorgan.
Generally, pricing on triple-A CLO tranches is currently at 85 to 105 basis points, double-A tranches are at 280 to 300 basis points, single-A tranches are at 275 to 425 basis points, triple-B tranches are at 500 to 550 basis points and double-B tranches are at 800 basis points, according to Barclays.
This appeared to hold true in recent transactions, including a $381 million CLO called Tribeca Park 2008-1, which priced on April 14 and is from GSO Capital. Triple-A paper came in at 98 basis points, double-A paper priced at 350 basis points, single-A paper priced at 500 basis points, triple-B paper priced at 600 basis points and double-B paper came in at 900 basis points, according to JPMorgan.
Invesco priced Hudson Canyon Funding II the same week. Triple-A paper for the $435 million CLO priced at 110 basis points, JPMorgan said.
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