Citibank last week priced the notes for OppenheimerFunds subsidiary HarbourView Asset Management Corp.'s latest collateralized loan obligation, a deal that stands out from the crowd because of the ability of the manager to buy a bucket of deeply discounted assets and the inclusion of reallocation and triple-C haircut tests. The $300 million deal, called Harborview CLO V, allows the manager to invest up to 2.5% of the deal in defaulting assets and 5% in triple-C assets, said Sean Dougherty, an analyst with Standard & Poor's, who added, "The manager believes there is a real value play there." Officials at HarborView and Citibank declined comment, citing the private placement nature of the transaction.
Many managers have CCC assets in their portfolios, but not by design. According to one portfolio manager, HarborView has set aside a distressed bucket in the past, as have a few of the "better managers." The manager noted that the inclusion of the bucket revolves around the feeling that there is good value in the distressed loan market. "[In] this part of the credit cycle, weaker credits have been identified and defaults have occurred," he said. "There is value in either low-rated or pre-packaged situations." Most CLOs cannot buy defaulted or low-rated paper due to their structures. HarborView has a team of savvy investors who can operate in the distressed world, according to the manager. The team includes Art Zimmer, senior v.p. and portfolio manager, and Joseph Welsh, v.p. and portfolio manager.
Another feature of the deal is the use of a stringent reallocation event test, which when triggered limits the amount of interest proceeds that can be released to the equity holders. If the triple-C bucket exceeds 10%, all triple-C rated collateral in excess of this will be held at 70% of par, which could trigger the reallocation event test, said Dougherty. Half of the available interest collections will be diverted to purchase additional collateral instead of being released to the equity holders. "There has been more and more discussion of using haircuts for CCC assets," added Dougherty. Because the deal has this provision to purchase distressed assets, there is a higher comfort level in having the reallocation test and the CCC haircut, but the two are not directly connected, said both Dougherty and an underwriter. Regardless of the distressed bucket, investors are increasingly requiring these features, the underwriter said, with one portfolio manager noting that some higher-rated note buyers are demanding this haircut treatment.
The $200 million of triple-A notes priced at LIBOR plus 54 basis points, which is within the recent levels on deals (see story, page 5). Two subordinate triple-A tranches totaling $30 million priced at LIBOR plus 80 points, while the triple-B tranche priced at LIBOR plus 350 basis points. The double-B tranche priced at LIBOR plus 875 basis points and the equity tranche was approximately 8% of the total vehicle. The manager has already bought $255 million of the assets for the CLO.