Octagon Credit Investors, the leveraged loan and high-yield manager subsidiary of J.P. Morgan Partners, is ramping up assets for a new $300 million collateralized loan obligation called Octagon V. Octagon waited until the end of the year before attempting to price. "The credit environment became more compelling," said an official familiar with the deal. The vehicle is structured to have up to 90% loans and 10% bonds and is approximately two-thirds done, he said. J.P. Morgan priced the notes. Officials at Octagon and a spokesman for J.P. Morgan could not be reached by press time.
Pricing on the $229 million Triple-A notes is LIBOR plus 60 basis points. This reflects the continued widening of spreads in November and December, said a banker. The Triple-Bs priced at LIBOR plus 300 basis points. Still, raising debt is considered no small achievement in this market. "A lot of guys have lost money on CDOs, but this received a positive reception," said a banker. One explanation is that though CDOs have hurt investors, CLOs have outperformed high-yield bond and investment grade CDOs in terms of rating agency downgrades, an analyst said.
Even though spreads on the underlying collateral are widening, one portfolio manager still questioned the economics of completing CLOs right now at these kinds of spreads. "Where the BB tranches are pricing at LIBOR plus 800 and the Triple As at LIBOR plus 60, the equity is not attractive and the debt is too expensive," said the manager. The BB tranche for Octagon priced at LIBOR plus 825 basis points. The manager added that the high costs of raising debt will restrict the supply of CDOs this year.