UBS Warburg is raising the debt for Prudential Capital Group's Dryden 4 collateralized loan obligation. The prospective deal comes shortly after Ross Smead's leveraged bank loan group at Prudential raised debt for the $304 million Dryden 2002-3 CLO last December. Investors in CDO paper are said to be looking at the approximately $300 million deal over the coming weeks. This will be the first CLO that UBS has underwritten since bringing on board Mike Rosenberg and Jeff Herlyn as co-heads of the global credit CDO group from J.P. Morgan in March. UBS officials declined comment and Smead did not return calls. The last Prudential CLO was underwritten by Salomon Smith Barney.
A shortage of new issue in the loan market and a heavy influx of bonds to pay down bank debt has left many CLOs long on cash and resulted in lower spreads on deals. But according to one CDO analyst, the arbitrage in CLOs is very compelling, especially compared to alternative asset classes and the arbitrage of previous years in the leveraged loan markets. "Spreads have not tightened compared to high-yield bonds and still remain at historic highs," he said. Also, the debt-to-equity leverage ratios are currently well below the peak of the 1996-97 vintage, he added. Though the cost of raising the debt has increased slightly, equity returns can still deliver in the high-teens, he added. Finally, structural enhancements to the deals over the last six-to-12 months protect the debt more stringently, he said. The analyst cited early warning triggers and diversions of the waterfall from the equity for reinvestment, as two features that have helped.