A groundbreaking collateralized loan obligation underwritten by Citibank for TCW is now being shown to equity and debt investors in CLO vehicles, who said they are eager to be in on the deal. One source said the $500 million TCW Pro Rata CLO could even be increased. "The deal is now coming down the home stretch and is likely to be a third quarter event," said the source, who added that the idea has been almost two years in the making. The vehicle is the first cash-flow CLO that predominantly invests in pro rata debt (LMW, 2/3). Officials at TCW declined comment and credit derivatives bankers at Citi did not return calls.
TCW is said to be buying revolvers and "A" loans and the current environment is offering up a strong argument for why it is a good idea. Pro rata paper is still being offered at a discount, and so prepayment risk works in the investors' favor, said one CDO buyer. "Sophisticated investors will want it in their portfolio as it offers new names and higher yield prospects for an arbitrage that has been there for years," said another buyer.
The prospect of having to fund revolvers if they are tapped has made pro rata paper a tough investment for most institutional investors. But this transaction uses synthetic technology to reference the loans, but in a cash-flow format. A special purpose entity will issue several classes of securities, including credit-linked notes. Citi will acquire assets for TCW, selected by the manager, and the SPE will write credit protection to Citi, hedging against possible losses in the portfolio, a banker explained to LMW when first describing the transaction in February.
One CLO investor noted that the deal is complicated, but the firm is comfortable with the asset manager. "We issue synthetic CDOs so we are fine with that," said the investor. "We are also comfortable TCW will have worked it out." Another CLO manager said TCW has been managing cash-flow deals since the early 1990s and they have done synthetic transactions since the mid 1990s.