Deerfield Capital Management is planning a second collateralized loan obligation for this year in the roughly $300 million range. Jonathan Trutter, portfolio manager, said the fund is structuring a new CLO that will be launched into the market during the second quarter. The fund will be in the market buying up par names to fill out the leveraged loan collateral on the traditional, cash-flow arbitrage deal.
The impetus to do the deal came from a reverse inquiry, Trutter said, explaining that a past equity investor, which he declined to name, approached the firm looking to invest in a structure managed by the group. "They wanted to put money to work," he said, describing the investor's enthusiasm in a market that has found the attainment of equity investment as the greatest challenge in getting deals done.
Trutter said Deerfield will take its time buying assets. "We don't want to do a big deal and we want to have plenty of time to ramp up," he said, explaining that deal size in general has gotten smaller on CLOs and a longer ramp up period allows for more careful credit selection. "If you force a deal to ramp up too quickly you're likely to introduce credits with higher default probability," he noted.
Trutter described the secondary market as a "101" market right now, with demand outpacing supply on some names, resulting in a lot of credits pricing above par and the remainder often trading in the low 90s. He noted that a manager has to pick credits at 101 in today's market carefully because a lot of the deals do not have call protection and could leave a manager hanging over par if it drops later. In addition, Trutter avoids the common strategy managers employ of buying distressed credits at 85 and others at 101, recording the average of the two. "We don't like to dip down," said Trutter regarding credits under 90.
Deerfield has been an active player in the CLO market this year, closing a $325 million deal--Rosemont CLO I--in January. The deal was underwritten by J.P. Morgan. Trutter declined to comment on the underwriter for its newest deal because an engagement letter has not yet been signed.