Two market value collateralized debt obligations managed by TCW are to be liquidated after the manager failed to stay in compliance with minimum net worth and overcollateralization tests, triggering an event of default. TCW Leveraged Income Trust (LINC) and TCW Leveraged Income Trust II (LINC II), which consist of high-yield bonds, leveraged loans and mezzanine debt, have been suffering from underperforming markets for several years, according to a buysider. He added though, the period between July and October this year was the nail in the coffin.
The vehicles, which mark-to-market, had to be marked down steeply during that July-October period and assets had to be sold, he noted. If the market had turned six weeks earlier, then the vehicles may have had a different fate, the buysider said. The manager of the vehicles is in discussions with creditors now about how to liquidate the transactions, he noted. Officials at TCW declined to comment. Deutsche Bank is the lead underwriter for the two transactions. Caravelle Investment Fund, a $625 million market value collateralized debt obligation, is also being liquidated (LMW, 11/25).
On the TCW deals, Fitch Ratings has downgraded the $105 million subordinated secured notes to B from BBB on the LINC transaction. Fitch has also downgraded from the LINC II deal the $100 million of senior subordinated notes to B from BBB. The $30 million subordinated notes have been downgraded to CCC from BB and the $30 million junior subordinated participating notes have been downgraded to CC from B. The total amount of illiquid and semi-liquid assets is approximately 44% for the LINC portfolio and 30% for LINC II. Given the current market environment for high-yield bonds, loans and equity, there are questions over the ability to sell the less liquid assets.