Patriarch Partners has developed a collateralized loan obligation that will invest only in stressed and distressed loans and is also taking over collateral management for three CDOs comprised of high-yield bonds and loans. The recently closed $750 million vehicle called Zohar CDO 2003-I Limited, will buy loans from multiple sources and is the first non-static securitization of purely distressed loans with a five-year reinvestment period, explained Lynn Tilton , a partner and founding principal at Patriarch, a distressed debt firm with over $4 billion in assets under management.
Tilton, who holds a U.S. patent on the new structure, said the vehicle is mostly cash at the moment, but will target loans where Patriarch manages positions in other of its portfolios, thereby making a real difference in the restructuring process. "Zohar will be used to buy more of the companies in our portfolio, where we already know the name and have a gameplan," she said. Patriarch likes middle-market loans, but will also buy large syndicated loans and even some single-lender deals, she said. CDC IXIS underwrote the notes for Zohar. The Carlyle Group and GoldenTree Asset Management have pulled off CLOs this year with stressed and distressed loans, but they have contained a majority of par loans.
Christopher Howley , a director at Standard & Poor's , said Zohar is the first portfolio of assets made up of credits in various stages of workout. "This includes credits that have yet to file for bankruptcy, that are on the verge, to those that are being worked out and credits that are emerging."
Patriarch completed Ark CLO 2001 and Ark II CLO 2001-1. These two securitizations financed the purchase of a $1.5 billion bad loan portfolio from Fleet Boston Financial and an $800 million portfolio from CIBC World Markets , respectively. Zohar is designed with very strict diversification asset quality parameters, but still allows for the purchase of one-off, opportunistic purchases with multiple years of reinvestment using the same parameters, said Tilton. She explained the Ark deals were static, self-amortizing pools with no reinvestment allowed. The positive performance of the two Ark vehicles enabled the firm to get the rating agency approval for the deal, Tilton added.
The three deals that Patriarch is taking over are called Amara-1 Finance, Amara-2 Finance and Oasis Collateralized High Income Portfolios-1. Last May, Patriarch also took over management of two existing high-yield CDOs from other managers. The transfer of collateral management responsibility has been driven by the controlling party and noteholders. "They believe that Patriarch, as a platform with distressed asset experience, is best suited to manage these portfolios due to the stressed and distressed nature of much of the collateral," she said.
The firm has also raised $225 million in private equity commitments, which was used to buy additional loans and other assets of borrowers in Patriarch CDOs. Tilton estimates that the firm has close to 500 borrowers and now has grown to a staff of thirty after starting with just four. CIBC led the Ark securitizations, and that CDO team under managing director Ken Wormser , is now at CDC. Tilton said she has worked with ex-CIBC and now CDC banker Ralph Inglese on all three deals. Wormser declined comment.