Dean Criares is a managing director of The Blackstone Group and heads Blackstone Debt Advisors, L.P., the firm's CDO management business. Blackstone launched its loan management effort in 2002, and since then has raised three CDO funds totaling $2 billion. Monument Park CDO, the most recent, was the largest CLO in four years. Criares discusses the motivation behind Monument Park, second-lien loans and why there are so many new participants in the market.
LMW: Why did Blackstone decide to raise $1 billion for Monument Park CDO and what influenced the timing of the process?
Availability of capital and assets to buy are often out of sync. It is difficult to accurately time the market as to when the appropriate time is to raise capital. As well, it has been my experience that when windows--i.e. buying opportunities--open in the market, they are unexpected and do not last long. We have long sought a way to take the mismatch of timing out of the equation.
A necessary part of out business is capital raising and we try to do it in a fashion that limits downside risk to our investors. That's why when discussing Monument Park's structure with UBS it was so important, in a market like this, for us to push for an 18-month ramp-up period. (The average ramp-up period for CDOs is six months).
LMW: The last few months has seen an influx of second-lien loans. Does Blackstone invest in second-lien loans and what are the considerations?
We do have capacity for second-lien type opportunities, though we were not among the first to start buying them and only recently have concluded a rather lengthy legal and credit review of the asset class. Our first goal as buyers of first-lien debt was to make sure the first-lien position wasn't unnecessarily disadvantaged because there was a second-lien tranche included in the capital structure, as compared to more traditional deals that might have subordinated debt or senior unsecured notes supporting the capital structure. After conversations with attorneys and other structuring agents, we developed our own standards of what we think is important in terms of structure and in terms of the inter-creditor agreements that govern these transactions.
The conclusion we came to is that, in addition to cash flow considerations, it is very much dependent on the writing of the inter-creditor agreement and what the second-lien holders are willing to agree to in terms of giving up rights in a bankruptcy scenario--for example giving up rights to approve plans and restructuring arrangements. It's very much a case-by-case basis. It's very new for everyone and we are trying to look at the documentation that each of the underwriters has adopted as part of their standards. Recently we have seen more standardization for the class.
There are situations where the structure is appropriate and others where it is not. Once you understand how the second-lien works and there is still some disagreement as to how things will work in a bankruptcy, it's a matter of assessing each company to judge your interest in taking what is, inarguably, a subordinated position.
LMW: What have been the major recent developments in the bank loan market?
The last few months have been dominated by second-lien deals and dividend cashouts, which often go hand-in-hand. Also, the participant community has grown. You have hedge funds and new types of investors entering into the loan market. On any one deal, there can be a hundred different accounts, compared to four or five years ago when that number was probably thirty or forty names.
LMW: Why are there so many new entrants, when predictions several years ago were for consolidation?
When those predictions were made, the prognosticators were focused on the 'then-existing' participants in the market. They were not considering managers with dedicated pools of alternative investment capital who might be attracted to the loan asset class. Back then, the question was who can raise capital not who else has capital. When those alternative investors witnessed down periods in equity-like products, they began to look for a safer place to allocate a portion of their capital. Turns out, the loan market looked attractive based on the limited volatility it has displayed over the past decade or so.
LMW: Would a shorting product be useful to Blackstone?
Credit Suisse First Boston has a product that allows you to take a view on the loan market in a basket-type concept. People are shorting loans but traditionally we have been long-only. In the future, CDO-like vehicles might benefit from the flexibility to pursue a hedged strategy. Blackstone has traditionally used the secondary market to mitigate risk.
LMW: Has Blackstone considered indices that enable managers to reference loans synthetically?
We have done a fair amount of research and we know how to use indices such as SAMI (CSFB's synthetic loan index)--that take synthetic exposure. We have not as yet finalized the position on using those instruments on a consistent basis. We could use them to a limited basis, but it's not a part of the underlying investment thesis.