LightPoint Capital Management, the Chicago-based asset manager, has raised a $500 million collateralized loan obligation that uses Wachovia Securities' proprietary APEX structure. Tom Kramer, LightPoint ceo, explained that APEX provides flexibility to manage through the credit cycle, including if defaults rise.
APEX is a typical cash flow structure but contains several distinguishing features--it has fewer overcollateralization tests on the triple-B notes than conventional CLOs and also removes the need to issue double-B paper. On the triple-B tranches there is a swap that guarantees interest payment through the life of the transaction. There is also a replenishment account that covers losses.
An approximately $50 million revolver protects the issuer against par erosion due to defaults as well as distressed sales of credit risk securities. This allows the manager the flexibility to manage the workout process to maximize recovery values. The revolver is rated A/A-1 and has a guaranteed investment contract with FSA Capital Management.
If there is a higher default environment, LightPoint can draw on the revolver rather than breaking through the covenant tests and then the revolver is paid off over the next several cycles, said Kramer. "It's a good mechanism," he added.
Formed in 2002, this is LightPoint's third CLO. It is the first time the manager has used APEX, but it is not dissimilar to previous structures the firm has employed, said Kramer. The triple-A liabilities priced at LIBOR plus 26 basis points. "We're locking in long-term liabilities at historically low levels," he noted.