Blackstone Prices Debut CLO, Primed For Buying

Blackstone Debt Advisors has priced the notes on its debut collateralized loan obligation, a $600 million vehicle called Hanover Square. More than half the collateral has been warehoused, and Blackstone is set to ramp up the remaining assets in a market primed for investors. The deal has been in the pipeline for most of the year, but the division of The Blackstone Group hit the market now due to the increasing spreads on deals. "We had a warehouse facility, but were not aggressive in our buying strategy until August. When spreads to high quality issuers became more attractive, we bought assets," explained Dean Criares, managing director and portfolio manager.

Underwritten by CIBC World Markets with co-arranger J.P. Morgan, the Triple-A tranches on the deal are split into a $180 million revolver and $298.75 million of term loans. Explaining the presence of the revolver, Criares said, "We don't intend to use it aggressively, but to protect investors in periods when there are heavy prepayments or spreads contract." Criares explained there is no need to constantly invest, as the fund is not paying cash rates on the revolver. One buysider cited the revolver as slightly unusual and pretty big, but an underwriter noted CIBC likes to structure deals with this feature. "A number of people managing CLOs who experienced prepayments would like to have avoided negative carry in that period," the underwriter said.

The Triple-A tranches on the deal priced at LIBOR plus 45 basis points, well within the range of recent issuance. The notes are wrapped by Ambac Financial Group, however, and a rival portfolio manager commented there is a hidden cost to this. He cited it as an unusual move, but Criares said the underwriters provided that guidance. "This aided in selling a deal of this size," Criares stated. He declined to comment on the fees charged. Officials at CIBC and Ambac declined comment. A J.P. Morgan banker did not return calls.

Blackstone formed the collateralized debt obligation shop earlier this year, hiring Criares from CIBC World Markets (LMW, 5/19). Dan McMullen and Doug Paolillo also joined from CIBC as senior investment analysts, where along with Criares they worked on structured investment vehicles managed by Trimaran Advisors. Karen Lau, an investment analyst also joined from Banc of America Securities. "Investing in senior secured loans affords less volatility to the structure," Criares said. "Furthermore, most deals are private and the debt group can access Blackstone's expertise in the leveraged finance market."

Blackstone has retained at least 50% of the preferred shares in Hanover and the firm has put up a $114 million collateral commitment for investment in the CLO business. Going forward the group will modestly staff up and Blackstone has discussed adding an analyst and a capital markets professional, said Criares. The debut deal is named after a New York City park and future Blackstone deals will also be named in this tradition. J.P. Morgan is the trustee for Hanover.