The notes for Hewett's Island CDO, CypressTree Innvestment Management's innovative collateralized debt obligation, were priced late last month. The $257.5 million vehicle, which consists of 80-85% senior secured loans and 15-20% high-yield bonds, is distinct due to structural features designed to reduce negative arbitrage, market officials explained. The excess spread will be used to pay down the most expensive debt first, improving cash flow and boosting the return on equity over the life of the vehicle (LMW, 9/30). Links Securities underwrote the notes for the Boston-based asset manager.
The $188 million of triple-A notes were priced at LIBOR plus 52 basis points, and the $25 million of double-A notes have a spread of 95 basis points over LIBOR. The $7 million of single-A notes are priced off swaps plus 160 basis points. The $15 million of triple-B notes are priced at LIBOR plus 275 basis points, and the $10 million of double-B notes are priced at LIBOR plus 700 basis points. The vehicle also includes $12.5 million of preference shares.
There has been a widening of spread on triple-A and mezzanine paper, one banker said. However, underlying spreads also have widened, making this is a very good time to be ramping up, a portfolio manager countered. On the other hand, the double-Bs priced at a very good level, the banker noted. "This can be attributed to some of the structural features," he added. CypressTree principals Dick Omohundro, Peter Carnes, Martha Hadeler and John Frabotta created and managed the first-ever CLO, a $500 million precursor to today's CLO.