INVESCO Senior Secured Management's Avalon Capital collateralized loan obligation has built up a cash position of approximately $150 million or 30% of the portfolio. The situation is not unique to INVESCO and exists in other CLOs, explained Joshua Rezak, associate director at Fitch Ratings in New York, but the magnitude of the cash position is significant, he added. The remainder of the deal is comprised of 50% bank loans and 20% high-yield bonds.
"A year ago INVESCO amended the minimum Weighted Average Spread test on the Avalon deal. Despite this amendment they are still not meeting the minimum average margin of the portfolio or the interest coverage test. The current spread environment coupled with maturity limits of available collateral has made it difficult for INVESCO to identify appropriate collateral for reinvestment in Avalon," Rezak said.
One of the bigger limitations is that Avalon matures in September 2011 and the manager cannot buy assets that extend past the maturity date. "This means they are shut out of purchasing assets in the primary market and are selectively buying assets in the secondary market," he said.
Of the $150 million, approximately $46 million is being held in a priority note reserve account, which traps excess spread in the event of a failure of the book value ratio test. This will be released through the waterfall when the deal's reinvestment period ends in September 2006. The remaining $104 million is held as principal from normal amortization of the collateral and can be reinvested or used to redeem the notes sequentially after 90 days. Last March, $60 million of the class A notes were redeemed and a similar distribution is expected on the June 2005 payment date. An INVESCO spokesman said Fitch has affirmed the ratings on the notes. He declined further comment.