Deutsche Bank won the bid for an approximately $200 million portfolio of leveraged loans auctioned off by insurance giant AIG Global Investment Group last week. Traders said the cover bid was placed by J.P. Morgan at 100.77. Citibank, Lehman Brothers, Bank of America, Morgan Stanley and Credit Suisse First Boston were also said to have put in bids. Deutsche Bank is expected to sell the loans back into the market. Deutsche Bank traders and AIG officials declined comment. Bankers at the firms either declined comment or did not return calls.
The portfolio was mostly par loans and was from an old KZH vehicle that is being liquidated, said sources. One source said AIG, which has about $4 billion in loans under management, decided to liquidate the portfolio to harvest profits. It took over management of the deal approximately 18 months ago from Scudder Kemper Investments and according to the source, the portfolio has since performed very well.
One manager also described KZH deals as having "horrible structures" relative to deals that are in the market now. He said the predecessors to modern CLOs can have a higher cost of funding and more restrictive guidelines. But they can be liquidated at any time. He said there were over 20 KZH deals originated and there are now only five or so left with most either being liquidated or refinanced. Recently, General Re-New England Asset Management auctioned off a $335 million portfolio that was said to have come from its KZH-Pondview vehicle. That auction was won by J.P. Morgan, which bid over 101 and then flipped it to Eaton Vance Management (LMW, 2/13).
Another option to liquidating KZH portfolios is to roll the loans over into a more conventional cash flow CDO. However, in this case, a source indicated not all the investors wanted this, and AIG would have been neglecting its fiduciary responsibility by doing so. A roll-over for the manager is beneficial as it keeps the assets under management and the fees associated. But AIG, unlike many other managers over the last year, has continued to grow assets under management, and this was less of a consideration. AIG is currently in the market with a new CLO called Galaxy III that is being led by Goldman Sachs.