Sankaty Builds $500Mln Castle Hill CLO

Sankaty Advisors, the fixed income outfit affiliated with Bain Capital, is ramping up a new $500 million collateralized loan obligation, Castle Hill INGOTS. The vehicle is named after a lighthouse in the tradition of Sankaty deals and will be the second CLO completed in a year by the firm, following the $500 million Race Point CLO 1, according to a market source. "Sankaty is a consistent investor in the bank loan market, when the environment is attractive," said a source familiar with the transaction. Castle Hill is largely ramped up, with the collateral being overwhelmingly leveraged loans, he added. There is a very small bond-bucket, the source clarified. J.P. Morgan is underwriting and marketing the notes, which have not yet priced.

Jonathan Lavine, a managing director at Sankaty, declined to comment on the vehicle, citing the 144A nature of the transaction. The other two managing directors are Diane Exter, who focuses on loans, and Kristin Mugford, with the three being part of a team of 36 credit professionals. Sankaty has more than $6 billion in high-yield investments, with 12 different structured vehicles and two unlevered deals, said a source.

A Standard & Poor's report on the shop produced in conjunction with the Race Point CLO states the team's track record compares favorably with its peers of the same vintage, with Sankaty generally holding a lower percentage of "CCC" rated securities and defaulted securities. In addition, proceeds from sales tend to occur at levels above peer average. "Senior management at Sankaty reports that, to date, equity distributions have generally been consistent with or better than original ranges and that total paydowns of debt across all deals have been kept to a minimum," the report notes. Importantly, employees hold significant investments in the equity of each deal, S&P notes. The source also pointed out the Sankaty loan portfolio has outperformed the Credit Suisse First Boston loan index by almost two times since inception.

Castle Hill INGOTS joins a growing list of CDO deals in the pipeline (see chart). As busy as that market is, though, uncertainties about the economy and the Middle East make the picture for CDOs a bit mixed. There is a significant spread widening with notes issued by INVESCO and Aladdin Capital Management, for example, pricing wider than comparable deals earlier this year. According to Banc of America Securities, in the new issue high yield CLO market, AAAs and AAs widened by 2 basis points and 20 basis points to LIBOR plus 48 and LIBOR plus 90, respectively. At the mezzanine level, As and BBBs widened 5 basis points and 15 basis points to LIBOR plus 150 and LIBOR plus 260. At the subordinate level, BBs widened 40 basis points to LIBOR plus 785. "However, the spate of new leveraged loan supply, widening loan collateral spreads and steadily declining loan defaults are making it likely that the CLO supply will remain robust," according to Lang Gibson, director of structured credit research at B of A. The issue of raising equity is still problematic, however, according to portfolio managers and CDO analysts.