Babson Capital Management closed its first collateralized loan obligation with a significant bucket for other CLOs. Previously buckets for other structured finance products were kept small and not utilized to their full extent, said Russ Morrison, senior portfolio manager. The larger structured products buckets in Sapphire Valley I allows for more ratings and prepayment stability.
The $600 million deal has an initial target bucket of 20% for BBB and BB CLO tranches, which can be up to 25%. In previous deals, the bucket for both second lien and high-yield bonds, which could include other CLOs, was capped at 10%. Older deals were even prohibited from investing in structured finance deals as all-loan portfolios provide greater transparency. CLOs are much less likely to prepay than loans because of non-call periods and the fact loans can have high prepayment rates from time to time. In addition, CLOs have credit enhancement, which gives the deal more ratings stability.
The deal was upsized from its original $500 million level to $600 million on investor demand. Banc of America Securities was the underwriter. The deal priced Nov. 30, with the Class As at 27 basis points over three-month LIBOR. The deal closed Dec. 14.
In October it closed its latest collateralized loan obligation, the $550 million Babson CLO 2006-II, nearly 85% ramped, which is higher than the 2006-I deal, Morrison said. "Having more of the portfolio ramped at close means there's more visibility in the portfolio, which benefits investors," he explained.
Babson CLO 2006-II is composed of mostly broadly syndicated senior secured bank loans, with a small bucket for second-lien loans and high-yield bonds. The portfolio had more collateral at close because more was sourced from the secondary market. "Secondary prices were more attractive in the late summer/early fall when we started accumulating assets than in the spring [when the previous deal was ramped]," Morrison said. He did not have the precise figure for how much of the previous deal was ramped at close.
The CLO was upsized $50 million and its BBB and BB tranches were priced at the tightest levels yet for the manager, which Morrison attributed to investor interest in the deal and the asset class. The BBBs were priced at LIBOR plus 140 basis points, while BBs were priced at 340bps over. The 2006-I deal, which had the manager's previous tightest pricing for those tranches, was priced at 150bps over and 375bps over, respectively. Wachovia Securities was underwriter. The deal closed Oct. 26.