Welcome Back Lending? A Quick Look at the NewStar CLO

NewStar Financial Inc. last week sold the largest U.S. collateralized loan obligation in more than a year. The Boston-based firm, which lends to middle market buyouts, will use $225 million of the $275 million in proceeds to fund an existing portfolio of loans, allotting the remaining $50 million for originating new financing. The new money will be weighed toward leveraged buyouts, a source familiar with the facility said.

That a CLO would sell in this market is encouraging, but the deal wasn’t cheap. NewStar got Libor plus 375 on the AAA-rated tranche of its loan, which is expensive, but still lower than the market rate of  between Libor plus 550 to 650 for new loans. The AA-rated tranche is priced at Libor plus 750.

The structure is a static pool, meaning NewStar won’t be able to reinvest the proceeds once the loans are paid off and the life of the fund will be relatively short. Its weighed average lifespan is around 2.25 years, the source said. At that time, the firm hopes the market will have returned and NewStar expects to be able to issue more paper.

The firm may do another CLO as early as this year; NewStar typically sold one CLO per year prior to the onset of the credit crunch. As the secondary debt market improves, with AAA CLO spreads tightening, the firm hopes the primary market will follow with increased activity.

NewStar spent all of 2009 restructuring its balance sheet and defensively managing liquidity and credit, the source said. Prior to its most recent layoffs of 14 professionals last September, the firm also trimmed its headcount in February — alongside industry peers Orix Corporation, National City, Madison Capital, Churchill Financial and Freeport Financial. In addition to completing the CLO, NewStar completed a $75 million corporate debt issuance. Going forward, NewStar hopes to shift its activities to a “better mix of offense.”