CypressTree Investments, a subsidiary of Harborview Capital Management, is looking to buy assets for its Hewett's Island CDO, a collateralized loan obligation that includes a wrinkle designed to minimize ratings volatility. More than 50% of the collateral for the $255 million CLO has been bought, with the end product set to consist of about 85% senior secured loans, 15% high-yield bonds and a small portfolio of structured finance products. Repeated calls to managers at CypressTree were not returned.
The vehicle stands out from the crowd because it contains a feature whereby excess cash flow, normally available for the equity holders, will go towards the most junior subordinated notes, according to Fitch Ratings analyst Sajjad Hussain. This is worse for the equity holders in the short term but, by paying down the most junior notes, they are increasing excess spread over time, Hussain explained. "This is a solid feature to help reduce ratings volatility by building more protection for the senior classes," he said. "Over the term of the vehicle, the cash will be returned to the equity holders, and this will also decrease the cost for the issuer." He noted that the feature has not been seen in many deals, but that the agency would like to see more of it.
Although subordinated tranche investors--rather than the rating agency or equity investors--probably drove it, the feature is not necessarily bad for equity investors because it reduces the volatility of the vehicle, an analyst said. Anything that could dissuade equity investors is a concern because raising equity for deals has been a tooth-pulling experience, according to managers and bankers (LMW, 7/1).
The notes are being underwritten by Links Securities and are expected to price in the coming weeks, according to a source. The likely breakdown is $188 million of triple-A notes, a $25 million double-A tranche, a $7.525 million A+ tranche, a $7 million A tranche, a $15 million triple-B piece and a $10 million double-B tranche. CypressTree also will enter into an interest-rate swap agreement, referencing a notional amount of $30 million starting in August 2003.