Prudential Targets New CLO In Hostile Climate

Prudential Capital Group is in the market trying to raise debt for a new $305 million collateralized loan obligation named Dryden 2002-3, joining a growing pipeline of potential new deals. But the conditions for selling the senior and mezzanine tranches are in stark contrast from earlier this year, when Prudential last priced a deal, said a banker. The spread on the triple-A tranche for Dryden Leveraged Loan CDO, which priced in July, is LIBOR plus 43 basis points (LMW, 7/14), a level far tighter than current price talk. In addition to a widening of spreads on the senior notes, a banker noted that a number of deals in the pipeline are struggling to raise the mezzanine and equity portions, although he declined to specify which ones.

The proposed Prudential vehicle is an cash-flow arbitrage deal and will consist of 80-90% loans and a 10% high-yield bond bucket, according to a CDO structurer. The CLO is structured with a $220 million senior portion, a $60.6 million mezzanine section and a $24.4 million equity piece. Ross Smead, portfolio manager for the firm's leveraged bank loan division, declined to comment on the deal, citing the private nature of the transaction.

The CDO pipeline has been steadily growing over the last few weeks, with Stanfield Capital Partners, OppenheimerFunds subsidiary HarborView Asset Management, Merrill Lynch Investment Management and Barclays Capital Asset Management all entering the fray (11/4). But a number of other deals in the pipeline have been warehousing for most of this year. "They won't all get done, " Jeremy Gluck, managing director with Moody's Investors Service's structured finance group, said of the deals in the pipeline. "[But] investors do have a preference for repeat managers."

Also, the picture is comparatively rosy for CLO managers. "Investors remain wary of high-yield arbitrage CDOs, but investors are relatively more comfortable with CLOs versus CBOs," Gluck said. "Unlike high-yield CBOs, the CLOs have performed well in a difficult environment," he added. Even though spreads on the liabilities have widened over the last couple of years, the spreads on the underlying collateral have also increased, he noted.