London-based Babson Capital Europe, a fund manager running EUR2.7 billion (USD3.1 billion), is gearing up to manage its fifth leveraged loan collateralized loan obligation. The structure is imbedded with a portfolio cross-currency swap to hedge the currency mismatch between sterling assets and euro-denominated liabilities. Up to 30% of the underlying pool of senior and mezzanine loans can be denominated in sterling.
In the swap, Duchess V CLO, an offshore special purpose entity, will pay sterling and receive euro to match the quarterly euro payments to investors. If loses in the sterling bucket are greater than expected and the notional of the swap does not match the portfolio, Duchess will enter currency options allowing it to buy sterling with euro. In addition, the transaction features a series of asset swaps, details of which could not be determined. Babson declined comment on the swaps and trade counterparties.
The CLO has been road showed to insurance companies, pension funds, hedge funds and asset managers globally and will close on Wednesday. It was arranged by Citigroup and has a target notional of EUR500 million (USD585 million). Officials at Citi did not return calls by press time.
