Deutsche Bank last week priced a €450m Eurocredit Opportunities Parallel Funding I CLO for mezzanine debt fund Intermediate Capital Group. The purpose of the new transaction is to take out lower-value loans from ICG’s market value Eurocredit Opportunities CLO in order to increase that deal’s NAV and provide a greater cushion against mark-to-market triggers.
“This deal preserves additional flexibility within the market value CLO,” a person with knowledge of the deal said.
While seemingly a new deal, Parallel’s term cashflow structure sits within the old market value deal. The equity stakeholders of the original market value transaction are also equity stakeholders of Parallel. By structuring the new transaction as a sub-set or asset of the old deal, ICG is able to take advantage of the original transaction’s cheap term financing.
While it is hard to ignore the irony of using a new CLO to cannibalise an old one in order to stop forced selling, those involved were insistent that the new deal provided positive pointers for the future of the market for leveraged loan CLOs.
In particular, people involved said that debt of the deal had been placed with an entirely new CLO investor base. While many, if not all, CLO investors have been badly burnt in recent months, it seems there are others lining up to take advantage of what they see as a one-off opportunity to get exposure to secured assets that are trading at exceptionally cheap levels, well below the implied default rate.
The assets that have been used in the new cashflow structure are ones that have traded off technically, due to market illiquidity. Nonetheless, they are fundamentally good loans and in demonstration of its faith ICG retains exposure to the €80m equity piece.
In November 2005 Deutsche closed the original €400m Eurocredit Opportunities CLO, though this was subsequently tapped twice in May and November 2006, taking the deal size to €1.1bn.
Back in July 2007 one banker expressed considerable doubt about market value CLOs. “Do you want to be leveraging a portfolio of high-yield securities in a volatile turning market where, for example, mark-to-market movement could cause your investment to drastically underperform and potentially have to liquidate at the spread wides?” he asked prophetically.
The €312.5m Aaa/AAA rated A Class priced at plus 145bp. The €10m Aa2/AA rated B class printed at plus 250bp. The €8m A2/A rated C Class priced at plus 350bp, and the €40m Baa3/BBB– rated D Class at 800bp. All tranches have a February 2019 maturity.