Highland Capital Management has raised a $685 million collateralized loan obligation called Southfork CLO with J.P. Morgan leading the transaction. The deal stands out for two reasons. It is structured with an $82.2 million equity tranche that leaves overall leverage at approximately 8.3 times. This is lower than the average CLO, which is usually levered at above 10 times. Furthermore, part of the AAA-tranche priced at LIBOR plus 25 basis points, which is the lowest level seen in the CLO market. Officials at Dallas-based Highland declined comment.
A source explained that the equity portion of the deal was driven by a single investor looking for a more robust transaction. "The IIR will be lower, but the deal will "sail through the next [credit] cycle like a battleship," he said. The underlying collateral will be predominantly leveraged loans with small buckets for revolvers, bonds and second-lien loans.
Meanwhile, a $400 million A1-G tranche priced at LIBOR plus 25 basis points. This part of the deal is wrapped by an insurer to cut costs and ease execution, the source said, declining to name the insurer. He explained that the CLO market is currently being driven by negative basis trades. Investors are scooping up the AAA-CLO tranches and simultaneously purchasing credit protection from monoline insurers through a credit default swap. This is locking in the difference between the two spreads, which is enabling very efficient pricing. In Southfork's case, the wrap occurred inside the transaction.
Another part of the super-senior tranche is a $7 million A1-B priced at a fixed rate of 4.69%. This is to cater to investors that have fixed-rate buckets. The deal is considerably larger than most of the transactions completed in the past year. The source explained that the size of the vehicle is largely dictated by Highland's ability to source the appropriate collateral. He said Highland, which currently manages in excess of $10 billion, has better access to the underlying collateral than almost any manager in the market.