Highland Capital Management benefited from strong demand for its $550 million Bristol Bay pro rata collateralized loan obligation, with tighter pricing on the liabilities than anticipated, according to a source. The notes were underwritten by Citibank, which has pioneered the structure that enables loan managers to invest in pro rata loans.
The source said price talk on the $39 million junior triple-A tranche was LIBOR plus 75-80 basis points, but the tranche priced at 75 basis points over LIBOR after being well oversubscribed. Citibank retains the $389 million super-senior tranche that is only partially funded, reducing the costs for Highland. The double-A rated tranche priced at LIBOR plus 100 and the single-A at LIBOR plus 175 basis points. Highland officials and a Citi spokeswoman declined comment. The deal has not yet closed.
Bristol Bay is the third pro rata CDO from Citibank. TCW completed the first (LMW, 2/3/03) and PIMCO recently closed Silver Creek (10/5). Prior to these vehicles, pro rata loans were not considered suitable investments for CLOs. The spread on unfunded revolvers is too small to cover the costs of issuing liabilities in a normal cash flow CLOs. But the hybrid cash/synthetic arbitrage structure Citi has created gets around the problem of investing in revolvers and term loans by reducing the cost of capital. "The revolvers can be funded more efficiently," said a source.
The Highland CLO is identical to the other Citibank deals, said the source, who noted that the buyers are typically CDO-squared type investors.