Franklin Templeton Investments increased its latest collateralized debt obligation to $550 million--Franklin Templeton CLO II--before pricing notes to fund the vehicle two weeks ago. The vehicle was originally slated for $400 million at the beginning of its ramp-up period roughly six months ago. But, as attractive collateral became increasingly available, the size of the vehicle was increased. Chauncey Lufkin, portfolio manager, said 90% of the collateral, which comprises 95% leveraged loans and 5% high yield bonds, has been ramped up and the fund is currently in the process of investing the balance. He said the firm likes to ramp up as much as possible prior to issuing the notes so that it has a longer time and can be more selective about credits.
Lufkin said the size of Franklin's vehicle benefited from a number of favorable investment opportunities in the last few months as it strategized to launch the deal after January and close it before summer. "There's no new issuance in January and you have to buy assets before August," he noted, explaining the market's expectation for a new issue slowdown over the next couple of months.
Merrill Lynch issued $550 million in notes to fund the deal. Tranches supporting the vehicle included: a AAA tranche priced at LIBOR plus 41 basis points, a AA tranche priced at LIBOR plus 67 basis points, a BBB tranche priced at LIBOR plus 190 basis points, and a BB tranche priced at LIBOR plus 590 basis points, according to Lufkin. Merrill Lynch did not return calls by press time.