Collateralized loan obligation managers are increasingly looking to originate and underwrite middle-market loans rather than just invest, giving the shops greater influence over allocations and deal opportunities. GoldenTree Asset Management, Callidus Capital Management, Ares Management and Guggenheim Investment Management are among the firms entering the field, according to market players.
"Our theory is that there has been tremendous consolidation within the financial industries and as these entities become bigger they are less and less inclined to do business with smaller companies," explained Tom Shandell, a portfolio manager with GoldenTree. "We see opportunities for us to fill that void and make investments in middle-market companies and provide needed capital and at the same time being able to put quality assets to work for us."
Recently, CLO managers have bought middle-market loans for conventional CLOs, an area previously dominated by banks and specialty investors such as Antares Capital Corp. and Denali Capital (LMW, 1/19). The difference now is that managers are looking to go straight to the companies. Callidus has set the trail and recently was a co-lead with Merrill Lynch and J.P. Morgan on the debt backing Code Hennessy & Simmons acquisition of The Hillman Companies. "It's a more competitive market," another manager commented. "To get a higher return you need to originate that transaction to get an origination fee."
But originating loans is not possible for all CLO managers and having a backer is key. "Historically, CLO managers raise equity on a transaction-by-transaction basis and do not have excess capital available to underwrite loans. The legal structure employed by traditional CLOs further complicates matters due to trade or business issues prohibiting underwriting directly into the vehicles," explained William Brown, head of Wachovia Securities' loan arbitrage group. "Recently, the larger loan managers have been establishing hedge funds with more fluid domestic capital and may originate loans and spread them over several CLOs."
Allied Capital, which bought Callidus last November, is providing some of the cash and will backstop capital needs (3/8). Richard Ivers, ceo of Callidus, previously told LMW, "We have to be an equal partner so we can stand up and take risk, which we could not do with just a group of funds rather than underwriting capital." Allied has invested $150 million in the form of a revolving credit facility to support Callidus' middle-market underwriting and syndication activities, according to an Allied 10-Q filing. Managers at Guggenheim declined comment and an Ares spokesman also declined comment.