Trimaran Advisors is awaiting a vote from senior creditors on whether to immediately liquidate Caravelle Investment Fund, a $625 million market value collateralized loan obligation. A significant decline in the value of the assets caused Caravelle to fail its Class D overcollateralization tests due to markdowns on loans and bonds. The failings could not be cured, leading to an event of default, explained Elizabeth Russotto, a Fitch Ratings director. "The event of default gives the senior creditors the right to vote the fund into immediate liquidation, which would cause the collateral manager to rapidly liquidate the portfolio," Russotto explained.
Officials at Trimaran referred questions to CIBC World Markets, which provides the revolver for the vehicle. CIBC bankers declined to comment. Trimaran is reviewing alternatives to avoid a rapid liquidation. Given the ongoing market volatility, Fitch is concerned about the value of the portfolio and the return of principal to the class C and class D noteholders in the event there is not a controlled and orderly liquidation of the portfolio, Russotto added. She said that there is no defined time period as to when the senior noteholders have to decide on liquidation. Approximately 35% of the portfolio is liquid, but among the assets are $125 million invested in other CDOs, which cannot easily be traded. Fitch has downgraded the $78 million Class C subordinated notes to B from BB and the $52 million Class D junior subordinated notes to CCC from B.
For a market-value vehicle, securities are issued and the proceeds are invested in loans or bonds. The manager has considerable flexibility to trade and the portfolio is marked to market at least weekly. But with a market value CDO, each category of investments is assigned an advance rate by the ratings agencies. A cushion has been built into the advanced rate based on the historical price volatility of the asset class. However, "None of the structural features of market value CDOs provide any benefit if you can't trade out of the less liquid assets," she said.
The potential liquidation has implications for market-value CDOs going forward. "The structures have worked very well for the debt holders since there have been no principal losses to date for the debt," Russotto noted. But "the equity holders have not fared quite as well and it may be very difficult to raise a new fund in the future without their support." In the future, the advance rates may become more conservative given the fact that the market has experienced all-time high volatility, Russotto added. There may also be changes to the concentration limitations to limit exposures to less liquid positions.