Silver Point Capital, the Conn.-based hedge fund founded by ex-Goldman Sachs partners' Edward Mule and Robert O'Shea in 2002, is using the collateralized loan obligation market for the first time. IXIS Capital Markets is leading two CLOs, the $737 million Field Point I and the $865 million Field Point II, to provide lending capacity for the specialty lender.
"Ultimately these are origination vehicles rather than pure arbitrage vehicles," stated Sean Dougherty, a director with Standard & Poor's. The two CLOs will contain middle-market assets, comprising revolvers and term loans. As a result, there is an A2 revolving tranche that will enable the firm to fund the revolvers. Also, as Silver Point has to originate the assets and cannot predict the forward pipeline, it will mitigate the issue of negative carry, he said.
The vehicles will have a 22% equity component, which is significantly higher than a traditional CLO. But the assets will be potentially riskier. Dougherty explained that Silver Point's business differs from loan asset management firms. "These guys have a lot of distressed/private equity experience and have the ability to work out distressed debt," he said. The average rating of the loans will be B- and the minimum weighted average coupon will be 8%. In the past year, Silver Point has made loans to companies in tough spots such as Salton, maker of the George Foreman grill, aaiPharma and Oxford Automotive. SilverPoint officials and Ken Wormser, who heads up IXIS' securitization team, did not return calls by press time.
Cerberus Capital Management completed a deal similar to this in 1998, but it is only this year that origination funding vehicles such as these have taken off, said Dougherty. At the beginning of this year Cerberus tapped the market through IXIS with A3 and A4 Funding. Bernard Loan Investors and Fortress Investment Group have also gone to the bank to raise similar deals. In all instances two CLOs have been issued simultaneously. The CLOs are issued as two separate vehicles for tax treatment purposes, said Dougherty. One is an on-shore vehicle whereby the investors have to be U.S. persons as defined by the tax code. The other is off-shore and can be non-U.S. persons under the tax code. The notes have also been insurance wrapped in these deals, with Assured Guaranty Corp. wrapping the Field Point CLOs.