J.C. Flowers teams with CSAM for CLO investment fund: Reuters

J.C. Flowers Asset Management has teamed with Credit Suisse Asset Management (CSAM) to raise a fund that will invest in the mezzanine and equity tranches of US and European Collateralized Loan Obligations (CLOs), according to a letter sent to investors last month.

The price of an index that measures the total return of CLO mezzanine debt rose to its highest level ever in August, a sign of continuing interest in the funds, which are the largest buyer of leveraged loans. Still, issuance is forecast to fall more than 60% this year from $98.5 billion in 2015 as the market prepares for risk-retention rules that take effect in December, which will force managers to hold onto a portion of their fund’s risk.

The JCFAM Madison Park CLO Opportunity Fund is currently fundraising and may invest in new-issue CLOs as well as existing deals, according to sources. J.C. Flowers Asset Management will serve as the fund’s advisor and CSAM as the fund’s sub-advisor, according to the letter.

CSAM managed about $15.5 billion in CLOs as of June 30, the biggest US CLO manager by assets, according to an August 3 report from Moody’s Investors Service. It raised an $814.25 million CLO with Citigroup in July, the largest of the year, according to Thomson Reuters LPC Collateral data.

CLOs, which pool loans of different credit quality, sell slices of the fund of varying seniority, from Triple A to B, to investors such as insurance companies. The most junior and riskiest portion of the fund, the equity slice, is paid last with what is left over after the fund’s bondholders receive their distributions.

Spokespeople for J.C. Flowers and CSAM both declined to comment.

The JCFAM Madison Park CLO Opportunity Fund will be able to invest 20% of the fund in CSAM CLOs, according to sources. It will not be used for risk-retention compliance.

While US CLO issuance is down about 55% this year compared to the same time period in 2015, according to LPC Collateral data, the tranches are still attractive and may offer better yields than similarly rated debt. There has been $31.2 billion of CLOs arranged in 2016, according to the data.

Spreads on CLO Triple A tranches, the largest and most senior portion of the fund, are currently about 153 basis points compared to Triple A spreads of 70 basis points on five-year, non-agency commercial mortgage-backed securities, according to an August 1 Wells Fargo report.

The price of the Palmer Square CLO Debt Index (CLODI), which measures the total return of CLO mezzanine debt, rose to its highest level August 8, hitting 102.18. The price has increased every day since a three-day drop in late June following the United Kingdom referendum to leave the European Union.