Wachovia Securities' middle-market loan arbitrage group has completed its first securitization, a development that could boost liquidity for the fast growing middle-market CLO product. The approximately $247 million deal, known as CoLTS Trust 2004-1, is a static pool of 45 loans with the collateral from a group of underwriters including GE Capital, American Capital andCapitalSource. "Wachovia is attempting to build liquidity into middle-market loans, in addition to tapping into growing interest in middle-market CLOs," said Sean Dougherty, a Standard & Poor's analyst.
He explained that CoLTS predominantly contains middle-market loans, as well as a 20% portion of broadly syndicated leveraged loans. In contrast to many other middle-market CLOs, which are funding vehicles for the manager, only 20% of the loans are Wachovia originated.
As well as providing benefits to the overall market, Wachovia is tapping into an increasingly popular form of securitization, Dougherty said. "The middle-market area is really growing as a way to juice up returns," he said. "As spreads tighten on syndicated leveraged loans, people are getting more involved in the middle-market. Now a more typical CLO manager will have a 10% bucket for middle-market loans." This transaction has a weighted average interest rate of 6.7%.
By being a participant in the origination of loans from other firms, one potential beneficiary could be Wachovia's CDO underwriting business, said one source. He explained that by facilitating the loan operations of potential clients, it is another factor that could attract these firms to Wachovia. A Wachovia spokesman declined to comment on the deal until it closes.