Highland Capital Management is ramping up and trying to grow its $500 million collateralized debt obligation--Highland Loan Funding V--before pricing notes for the vehicle next month. Sources close to the deal said the fund has ramped up roughly 60% of its assets, which represent a broad range of sectors and consist of 90% senior loans and 10% high yield bonds. Salomon Smith Barney is underwriting the traditional, cash flow arbitrage structure. Chase Manhattan Bank will act as trustee. Officials at Highland did not return calls by press time.
The manager is reportedly looking to upsize the vehicle to as much as $600 million, including both the equity and debt tranches, with the goal of completely funding it before issuing liabilities. One banker said the percentage of assets invested before launch is a question of preference and style as managers on average usually have roughly three months to complete the investing phase after the notes have been issued. In this case, the manager reportedly would like the vehicle to be as fully funded as possible. "Any amount not accumulated is negative carry. You've raised the money but you haven't spent it yet," said the banker, explaining that a lower amount of up-front investing reduces the fund's return on equity after it closes the issuance of the debt for the deal.
Tranches for the vehicle reportedly include AAA, eight-year notes with price talk of LIBOR plus 42-45 basis points; AA, nine- to 10-year notes with price talk of LIBOR plus 70-75 basis points; BBB, 10-11-year notes with price talk of 110-120 basis points; and an equity piece. The rating agencies have not yet issued an official pre-sale report on the notes.