Citigroup is working on a USD500 million collateralized loan obligation for PIMCO that will reference pro-rata loans, and will be only the second actively managed CDO to tap the much maligned revolver and "A" loan portion of the capital structure. The deal is said to mimic a structure Citibank created earlier this year for TCW Group, said a market official.Powell Thurston, a PIMCO product manager, and a Citi spokeswoman declined comment.
Asset managers tend to steer clear of pro-rata loans because the revolver needs to be funded and the undrawn spreads are too skinny. Instead, CLOs are dominated by "B" loans, which are longer-dated and have higher spreads.
Vandana Sharma, an analyst at Standard & Poor's, explained that in the quasi synthetic hybrid cash-flow TCW deal the partially funded synthetic structure reduces the weighted average cost of the liabilities due to the fact that only USD150 million of funded liabilities are issued against a reference portfolio which is approximately USD500 million, she explained. It could not be determined if the PIMCO CLO uses the same structure.
The issuer synthetically invests in an actively managed reference portfolio of senior secured pro-rata loans, it then enters a swap with Citi in which the bank passes through the net interest and trading gains.