* Manager includes big bond bucket in new CLO
* Fixed rate assets determines deal's capital structure
* Transaction prices inside previous CLO from Cairn
By Anil Mayre
LONDON, April 10 (IFR) - Pramerica's new EUR300m CLO, only
the second so-called "CLO 2.0" structure to price in Europe
since the crisis, allows the asset manager to buy bonds rather
than having to scour the market for scarce leveraged loan
The technique appears to offer managers with a new strategy
to ramp up CLO deals to a meaningful size quickly with similar
In March some USD30bn of high yield bonds priced versus just
under USD7bn of leveraged loans, according to Thomson Reuters
Pramerica's Dryden XXVII Euro CLO 2013 transaction, via
Barclays has a target portfolio of EUR291m of which 75% must
comprise senior secured loans and bonds. However, there is no
specification on the bond/loan split.
However, the current portfolio cut, as detailed in rating
agency reports, shows 37% expected to be bonds. This subgroup is
further split 26.01% senior secured securities, 7.9%
subordinated and 3.09% senior unsecured. The remaining 63%
comprises loans of varying status - 59.9% of which are senior
Cairn CLO III, which reopened the CLO market in February,
took a more concentrated view on the loan market.
Its investment rules required a minimum 90% of the EUR300m
portfolio to be invested in senior secured loans. Unsecured
senior loans, second lien loans, mezzanine obligations and high
yield bonds are all lumped together in a bucket restricted to a
In money terms, this means that Pramerica can source fewer
loans than Cairn. Its target pool is EUR174.3m of senior secured
loans (59.9% of EUR291m), while Cairn has to find almost EUR100m
more of loans at EUR270m in a similarly sized deal (90% of its
target EUR300m portfolio).
Both transactions are permitted a six month period during
which they must acquire the remaining assets. In the meantime,
they incur negative carry - paying out more on the bonds than
they receive on the underlying loan pool.
PORTFOLIO DETERMINES STRUCTURE
Digging deeper into the portfolio statistics reveals some
marked differences between the two deals, and provides other
managers with evidence of how the choice of assets may affect
the capital structure.
Cairn, on the one hand, put a cap of 5% of the proportion of
fixed rate assets in the portfolio. This poses some interest
rate mismatch risk with the floating rate bonds, although it is
small. Its capital structure was entirely floating rate.
Pramerica, on the other hand, allows for 40% fixed rate
securities (expected to be 33.92% of the target portfolio)
according to the presales. This mismatch in risk requires
mitigation, coming in the form of fixed rate bonds accounting
for 30% of the capital stack.
During marketing, this 30% was covered by a EUR90m fixed
slice in the Class A tranche, offered alongside EUR79.5m of
senior floating notes.
At pricing the fixed senior bond amount was reduced to
EUR69m and the floating portion upped to EUR100.5m. Additional
fixed rate notes were also spliced into the structure down the
rating scale to maintain an overall 30/70 fixed to floating
Pramerica must ensure at least 20% is invested in fixed
securities because defaults and prepayments may affect the
effectiveness of the hedge, according to Fitch. As long as the
fixed instruments are within a 20-40% range, no additional
hedging is required.
There are yet further differences in the structure between
the two deals, providing managers with some options - namely how
to satisfy the Rule 122a risk retention, or "skin in the game"
Pramerica complies with this rule by holding a vertical
slice of the transaction worth 5%. Cairn, meanwhile, placed the
EUR15.5m M1 equity tranche with a US pension fund.
The retention concept is a stumbling block for the
development of the market, as thinly capitalised CLO managers
may not have the ability to hold 5% of a deal from their own
One investor said the inclusion of fixed rate note assets in
this low rate environment would suits the equity holders -
rising floating rates would eat into their return.
AT THE TIGHT END
Dryden came at, or through, the tight end of guidance across
the structure. Having Cairn as a reference point helped, and it
beat it comfortably.
The senior floating notes came at six-month Euribor plus
135bp from talk of 135bp area (the fixed notes at 2.292%), the
Double A printed at 190bp from talk of low 200bp (fixed rate at
2.929%), the Single As at 290bp from talk of 300bp area (fixed
at 3.929%) while the Triple B floater came at 400bp (talked at
The Double B tranche printed at a discounted cash price of
96.20 with a coupon of 475bp.
Cairn cleared at 140bp, 235bp, 325bp and 425bp across the
Triple A, Double A, Single A and Triple B bonds. It did not
offer Double B notes.
(Reporting by Anil Mayre; editing by Alex Chambers)