Phoenix Investment Partners, historically an issuer of collateralized bond obligations, has tapped the leveraged loan market for the first time to attract investors into its $300 million collateralized debt obligation, Nova CDO 2001, which closed last month. Nelson Correa, managing director of alternative products, said discussions to warehouse leveraged loans for the vehicle started roughly six months ago as arbitrage spreads became attractive in the leveraged loan and high-yield markets. At the same time, luring equity investors into deals became more difficult. "Loans make the deal more attractive because investors are more receptive because of the higher recovery rates," said Correa, explaining that equity typically dictates deal size and finding equity investment in a rising default rate environment would have been challenging on a purely high-yield deal. Correa said the company is working on an upcoming multi-sector deal and is keeping its eye on Europe as it continues to plan deals other than CBOs.
Timothy Norman, portfolio manager at Phoenix, also noted the loan market provided a more comfortable alternative for meeting diversification requirements set forth by the ratings agencies. He said the fund was able to invest in less favorable sectors without taking on the risk level of the high-yield market. "As a collateral manager it's nice to have the loan alternative for certain industries so you can make a relative value decision between the bonds and the loans," he said. The portfolio mix will range between 66% to 75% high yield bonds and 25% to 34% secured and unsecured bank loans to provide management flexibility. Correa said Phoenix tapped Antares Asset Management to advise on portfolio management for the loan portion of the deal.
CIBC World Markets underwrote the deal, which comprises a $237 million class A tranche priced at LIBOR plus 44 basis points, a $17.1 million class "B" tranche priced at LIBOR plus 220 basis points, a $13.2 million class "C" tranche priced at LIBOR plus 650 basis points, a $13 million class "D" tranche priced at LIBOR plus 800 basis points, and a $20 million equity tranche. Equity investors include Phoenix Home Life and Antares.