Deerfield Capital Management, one of the top three issuers of CDO debt last year, is in the market with a new $325 million collateralized loan obligation--Rosemont CLO I-- and intends to shop for the remaining 40% of the deal's collateral in the first quarter. "We want to participate actively in the new issue calendar," said Jonathan Trotter, portfolio manager at Deerfield. The firm's latest fund is a cash-flow arbitrage structure that is already 60% invested in leveraged loans with 40% of leveraged loan assets still needing to be ramped. "We're looking for par and near-par names," he said, declining to name specific credits.
Trotter added that the portfolio of assets backing the deal will be diversified across many sectors as most deals must meet diversification standards set by the ratings agencies. But he mentioned the shop historically has avoided the retail sector as low margins in the industry do not seem to absorb a lot of leverage well. Trotter explained that credit selection, more than pricing, is key for the firm when buying up assets. "We'd rather pay a little more if we know the loan will perform," he said.
J.P. Morgan priced liabilities on the deal last month. The $252 million Standard & Poor's AAA-rated tranche priced at 45 basis points over LIBOR, which according to J.P. Morgan research falls within the quarterly average pricing on the tranche for the asset class. The $13.2 million BBB-rated tranche priced at LIBOR plus 260 basis points. Trotter said an attractive arbitrage remains in the market, prompting the manager to ramp at this time. "Arbitrage is not as attractive as it was Sept. 12, but you still get a good arbitrage relative to other asset classes."
Trotter said the firm is planning to do another arbitrage CLO at some point this year that will be roughly the same size as Rosemont, which is smaller than previous deals for the firm. "Three or four hundred million seems most appropriate now," he said. "If a deal is too big you get stuck with names you don't want." Also planned for the new year will be a couple of hybrid deals most likely combining asset-backed securities and investment-grade bonds.