Franklin Templeton Investments is reportedly in the process of warehousing assets for a $400 million collateralized debt obligation--Franklin Templeton CLO II-- which will have an underlying asset base comprising 95% leveraged loans and 5% high yield bonds, according to market sources. Chauncey Lufkin, portfolio manager at Franklin, declined to comment on the vehicle. Merrill Lynch will underwrite the deal and is reportedly also stepping up as an equity investor. Officials at Merrill Lynch did not return calls by press time.
The vehicle will be a traditional cash flow arbitrage structure, created to gain spread between the assets in the portfolio and the notes issued to fund the deal. Franklin has reportedly ramped up more than two-thirds of the assets required for funding the vehicle as the fund's investment style is to warehouse as many assets as possible before issuing liabilities.
Pricing and sale of the notes is supposed to take place in the next month with a final ramp-up phase immediately following. Tranche structure or a trustee for the deal could not be determined by press time. The underlying collateral is expected to have an average rating of Ba3 and an average income of LIBOR plus 325-330 basis points. One buysider familiar with the vehicle said the market expects returns for the vehicle to be commensurate with the 20-22% return Franklin achieved on its last CDO, Franklin Templeton CLO I. "They've been really successful in the past and they're doing the right sized deal," he commented. He explained that Franklin's decision to do a $400 million deal, in a market where competition for good credits is stiff, should enable the fund to pick and choose assets carefully.