A class of notes for Smoky River CDO, a RBC Leveraged Capital collateralized loan obligation that was previously managed by Indosuez Capital and called Indosuez Capital Funding IV, has been placed on watch for possible downgrade by Moody's Investors Service. RBC Leveraged Capital was formed by ex-Indosuez staff last year, including Daniel Smith now head of CDO asset management at RBC. Shortly afterwards, investors voted to switch management on the $1.3 billion CLO. Smith declined comment on the situation.
According to Moody's, the review has been prompted by the continuing loss of par and deterioration in the overall credit quality of the underlying assets. Moody's notes that the extent of the par loss has triggered an event of default. Moody's also noted that the CLO continues to violate its Class B par value test as well as its maximum rating distribution test. "The environment has been disastrous," said one portfolio manager. "The underlying collateral performance is no worse than the market and in some cases better," he explained. The transaction has an old capital structure, with over-collateralization triggers that are tighter than accepted today, he commented. "There were 16 or 17 CLOs completed in 1998 that are doing similar," he added.
The notes of the affected class are the $125 million (current outstanding amount) Class B-1 7.47% Fixed Rate Second Priority Senior Secured Notes due 2010 (currently rated Baa3) and the $96 million (current outstanding amount) Class B-2 Floating Rate Second Priority Senior Secured Notes due 2010 (currently rated Baa3).