Last month Citi priced the $585 million Dryden 6 CLO for Prudential Investments that used the same Citi vehicle. Other big name managers such as PIMCO and Trust Company of the West (TCW) have also used the structure that enables them to tap revolvers, but no other bank has mimicked the invention. There are several advantages to buying pro rata loans, primarily availability and the cheaper pricing compared to B loans. However, pro rata loans are less liquid and the unfunded nature of revolvers makes them unsuitable for a traditional CLO.
However, the hybrid cash/synthetic arbitrage structure Citi created with TCW gets around the problem of investing in revolvers by reducing the cost of capital. A super senior revolving tranche is issued that addresses the low unfunded spreads on the loans. The issuer then synthetically invests in an actively managed portfolio of pro-rata loans and enters into a swap agreement with Citi, which holds the loans on its balance sheet. The bank will be the buyer of protection on the portfolio of revolvers and term loans.
Highland also recently bought the retail loan fund business of Columbia Management Advisors increasing the assets under management to approximately $10 billion.