 |
 |
| Gretchen |
Christopher Allen |
TS: What are your plans for coming to market with a new CLO and what conditions you are looking for before launching a new deal? Allen: We have been actively discussing new CLOS since the middle of last year and are getting interested in coming to market soon. We thought there was a compelling arbitrage, but we think it’s even more compelling now that AAA spreads have come down to the 125 [basis points range] or even lower levels. We think now there is a compelling arbitrage for all investors with a conservative structure. It seems like some of the deals done early on had some fairly aggressive assumptions in order to make the economics work. We feel now, for our investors, we can put together a structure that makes sense for us and get really attractive returns for investors. We are actively exploring internally about doing a CLO and there is a very good chance we will be in the market in the second quarter of this year, very soon, with a new CLO.
TS: Have you already signed up a bank to arrange that deal?
Allen: We are very far along with one investment bank that we had chosen to do our first transaction, but we have yet to finalize all the terms and to start a warehouse to ramp the transaction.
TS: Any indication of what kind of leverage?
Allen: We have looked at different structures that show a varying degree of leverage. I think the latest show the equity would be in the 9% context. So we are in the same zip code of other deals being done today.
TS: Gretchen what were your concerns for the sector following the financial crisis and lessons learned?
Bergstresser: I think the most important piece of this is actually the bottom line, which is the lesson learned—the asset class and the structures worked. There is a lot of evidence for this. What we see is better managers produce better results. And as a side note, it’s not necessarily the biggest and best known managers that produce better returns for all investors.
Since the market is beginning to reopen, one of the things first, and foremost, to my mind is concern around spread tightening. As we all know, the loan market has an incredible propensity to re-price itself. Thank goodness with most of the new issue this year, we are finally beginning to see 101 soft call protection. In most instances it’s for a full year and by the end of April it was around 90% of new deals. That’s clearly a good thing for loan investors. Related to that, there is concern around structural issues in the underlying documentation, as well as leverage profiles. We are able to protect ourselves against over levered situations based on our original underwriting standards, just as our group did though the last cycle. That nicely contributed to our better performance compared to our vintage of deals.
More recently we are starting to see some new issue [corporate loan] activity. The pipeline seems to be building. We are told it’s likely to be in the context of $30-40 billion of new activity in the next one-to-two quarters. It’s likely going to be a mix of new, new deals, as well as some additional re-pricings and re-financings.
TS: Are you getting any reverse inquiry for AAAs or the equity in your new deal?
Bergstresser: Ever since August or September we’ve started to get inquiry across the capital structure from existing investors. Nice demand at the bottom of the capital structure in the equity and really nice demand at the AAAs, and demand across the middle parts of the capital structure too. And that demand has persisted. We have a couple of guys that keep calling us, saying, “I know you’re thinking of doing a new deal, please let us know when you know what the time frame for that is.”
Allen: It’s been nice to hear from our investors that we’ve been one of the best performers in their portfolio. It’s also nice to hear from people who didn’t invest with us originally, that they’ve been following our track record, buying our CLO tranches in the secondary market and are eager to invest with us when we start issuing new CLOs.
TS: What qualities are you looking for in an investment bank when you are thinking about doing a new CLO?
Allen: Some of the qualities we look for are, good execution, making sure you have the right investors in the deal, that the tranches trade at the right level and that you have the right structure that works. Secondly, we also look equally at distribution capability. We have a fair amount of equity we are looking to invest alongside our investors, but we are very interested in looking for third-party investors. Finally, warehousing is a sensitive subject given the history during the financial crisis and warehouse losses people suffered. We want to make sure we have some flexibility in the warehouse terms that are being offered. One, in terms of leverage, two, the lack of mark-to-market triggers for a certain period of time. And three, if ultimately, we are unsuccessful in closing a CLO, the ability to transform the warehouse into something equivalent to a total return swap program that we can utilize for several years.
TS: The last point I’d like to hear about is CLO consolidation. Apidos in February acquired five CLO contracts from Churchill Pacific Asset Management. How did you integrate the business with your current platform? Will you be looking to acquire more CLOs?
Bergstresser: We undertake substantial diligence across numerous issues including the vehicles and portfolio positions during the bidding process. In the case of Churchill Pacific Asset Management, the process spanned about a 12-month period. It’s a fairly lengthy period of time and a lot of diligence that we had done on an upfront basis. As an aside, we were one of the first CLO managers to participate in a CLO consolation. We took over four vehicles from ACA Capital in 2008 (TS, 5/19/08) and integrated those very successfully. We’ve got robust internal system and procedures. Even before closing, for example, we uploaded the positions from the new vehicles into our systems, readying ourselves for the close and to be able to actively and proactively manage the new vehicles.
TS: Is there a view to look at obtaining more CLO contracts?
Allen: We are definitely always looking at new opportunities. We are currently in the middle of exploring another transaction. We believe the trend of manager consolidation is going to continue for some time and we hope to be a major beneficiary of that.
Apidos is a leveraged loan and collateralized loan obligation affiliate of Resource America, an asset management firm with $13.3 billion in assets under management. Apidos manages approximately $5.8 billion across 16 CLOs and other vehicles.