Sankaty Crosses Line For CLO, Prepares For Long Haul Ramp-Up

Sankaty Advisors, the fixed-income affiliate of Bain Capital, has raised the debt for its new $550 million collateralized loan obligation Race Point II CLO, with the deal containing new structural features and a particularly long ramp-up period. The deal can have a 270-day ramp-up period, which is one and one-half to two times more than the average ramp-up period for a high-yield CDO, according to Ashleigh Bischoff, an analyst at Fitch Ratings. The long ramp-up is beneficial as it will give Sankaty flexibility to purchase the 50% of assets needed to fill the vehicle over the year, she said, adding that given the economic conditions, liquidity in the loan market could be impacted in the coming months.

The deal was originally slated to be $502 million but was increased to $550 million because of overwhelming investor response, according to a source. Deutsche Bank is the lead underwriter for the deal, which is Sankaty's tenth CLO. The deal scored one of the tightest pricings of any CLO, with Sankaty designing a portfolio that investors find very attractive in this market, the source added.

Race Point II has several features that use excess interest for the benefit of both debt and equity holders. These include a par deterioration test, whereby if the manager breaches an overcollateralization trigger of 106.7%, the manager must use 50% of the remaining interest proceeds to purchase additional collateral. The deal also contains collateral haircuts, so that any assets downgraded to CCC+ or lower in excess of 10% are carried at market value. The credit has to be trading below 85% of par to be considered haircut.

Additionally, for subordinated noteholders, an excess collateral account can, at the managers discretion, capture 25% of excess interest at the bottom of the waterfall, or up to $10 million into an account held by the trustee. This account can be used to purchase defaulted securities or "CCC" assets from the portfolio. This feature allows for the issuer to sell out of assets that provide little economic benefit to the structure while not locking in losses for the subordinated noteholders. The noteholders will potentially realize higher recoveries on defaulted and distressed assets by avoiding forced sales at distressed market values. Officials at Sankaty declined comment and a CDO banker at Deutsche Bank did not return calls.