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GoldenTree Prices $411M CLO via GreensLedge; YTD US Issuance: $24.8B

GreensLedge Capital Markets today priced a $410.95 million collateralized loan obligation for GoldenTree Asset Management, according to market sources.

Citi was the initial purchaser on the class A-1 tranche. PNC Capital Markets was also an initial purchaser.

Pricing details on the CLO are as follows:

GoldenTree CLO 2016-06-22

Up to 80% of the loans in the portfolio can be covenant-lite, according to a presale report from Moody’s analysts. Up to 30% of the assets in the portfolio are also permitted to be purchased at a discount.

The transaction will close on July 28 with a non-call period running until July 21, 2018, and the reinvestment period ending on Jan. 21, 2021. The stated maturity is on April 21, 2027.

Year-to-date issuance is now $24.8 billion from 59 CLOs, according to LCD data. June issuance is now $5.22 billion from 12 transactions. — Andrew Park

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This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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CLOs: DFG Investment Advisers raises $100M for New Strategic Fund

DFG Investment Advisers today announced that it has completed a $100 million first closing for a fund in anticipation of the risk-retention rules that go into effect at the end of this year for CLO managers.

DFG had over $2.5 billion in assets under management as of the end of May. Alberta Investment Management Corporation (AIMCo) announced a minority stake in the firm on behalf of its clients in January. DFG’s strategies range from corporate to structured credit assets through commingled funds, separate accounts, and CLOs.

The firm most recently closed a $406 million CLO, the Vibrant CLO IV via Goldman Sachs on June 10. — Andrew Park

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Leveraged Loans: Credit Suisse Prices $411M CLO for MJX Asset Mgmt

Credit Suisse today priced a $411.25 million CLO for MJX Asset Management, according to market sources.

Pricing details:

Up to 70% of the loans in the portfolio can be covenant-lite, according to market documents.

The transaction will close on July 20 with a non-call period running for two years and a reinvestment period running for four years following the close. The stated maturity is on July 19, 2028.

Year-to-date issuance is now ‎$23.58 billion from 56 CLOs, according to LCD data. June issuance is now $3.99 billion from nine transactions. — Andrew Park

You can learn more about how collateralized obligation vehicles work here, in LCD’s Loan Market Primer (it’s free)

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Voya Prices Second CLO of Year via Citi

Citi today priced a $407.25 million CLO for Voya Alternative Asset Management, according to market sources.

Pricing details are as follows:

The transaction will close on July 19 with a non-call period ending in July 2018 and reinvestment period ending in July 2021. The stated maturity is July 2028.

Year-to-date issuance is now $20.86 billion from 50 CLOs, according to LCD data. This is the third CLO in June for a total of $1.27 billion. — Andrew Park

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How did ACAS become a takeover target? Answer’s in the portfolio mix

How did American Capital become a takeover target? The answer lies in the lender’s equity-heavy, low-yielding investment portfolio mix.

Ares Capital, which trades on the Nasdaq under the ticker ARCC, announced on May 23 it would buy American Capital in a $3.4 billion deal, excluding the company’s mortgage management businesses. American Capital trades on the Nasdaq as ACAS.

One of American Capital’s strategies was its trademarked One Stop Buyout, where it could invest in debt ranging from senior to junior, as well as preferred and common stock, acquiring control of an operating company through a transaction.

However, the accumulation of equity did not allow the company to maintain the steady dividend growth that investors had grown to rely on.

In November 2008, the company stopped paying dividends and began evaluating them quarterly to better manage volatile markets. At the same time, American Capital announced an expansion into European middle market investing through the acquisition of European Capital. Also that year, American Capital opened an office in Hong Kong, its first office in Asia.

The news of the dividend policy change triggered a plunge in American Capital shares. Shares have persistently traded below book value since.

At its peak, the One Stop Buyout strategy accounted for 65% of American Capital’s portfolio. It has since slashed this to under 20% of the portfolio, of which less than half of that amount is equity. It continues to sell off assets.

In a reflection of the change in investment mix, S&P Global Ratings placed Ares Capital BBB issuer, senior unsecured, and senior secured credit ratings on CreditWatch negative, as a result of the cash and stock acquisition plan.

“The CreditWatch placement reflects our expectation that the acquisition may weaken the combined company’s pro forma risk profile, with a higher level of equity and structured finance investments,” said S&P Global analyst Trevor Martin in a May 23 research note.

At the same time, S&P Global Ratings placed the BB rating on American Capital on CreditWatch positive after the news.

“The CreditWatch reflects our expectation that ACAS will be merged into higher-rated ARCC upon the completion of the transaction, which we expect to close in the second half of 2016. Also, we expect ACAS’ outstanding debt to be repaid in conjunction with the transaction,” S&P Global analyst Matthew Carroll said in a research note.

Not the first time
But Ares Capital says it has a plan. In 2010, Ares acquired Allied Capital, a BDC which pre-dated the financial crisis. On a conference call at the time of the deal announcement, management said it plans a similar strategy for integrating American Capital, of repositioning lower yielding and non-yielding investments into higher-yielding, directly sourced assets.

Ares Capital managed to increase the weighted average yield of the Allied investment portfolio by over 130 bps in the 18 months after the purchase, and reduce non-accrual investments from over 9% to 2.3% by the end of 2012, Michael Arougheti said in the May 23 investor call. Arougheti is co-chairman of Ares Capital and co-founder of Ares.

“The Allied book was a little bit more challenged, or a lot more challenged, than the ACAS portfolio is today,” Arougheti said. Ares Capital’s non-accrual investments totaled 1.3% on a cost basis, or 0.6% at fair value, as of March 31.

“Remember, that acquisition was made against a much different market backdrop. And so, while the roadmap is going to be very similar… this can be a lot less complicated that that transaction was for us.”

The failings of American Capital’s strategy reached fever pitch last November, when the lender capitulated to pressure from activist investor Elliott Management just a week after it raised an issue with the spin-off plan.

American Capital’s management had proposed in late 2014 spinning off two new BDCs to shareholders, and said it would focus on the business of asset management. However, in May last year, management revised the plan, saying it would spin off just one BDC.

But Elliott Management stepped in, announcing in November that it acquired an 8.4% stake. It later increased its stake further, becoming the largest shareholder of American Capital. The company argued that even the new plan would only serve to entrench poorly performing management, and called for management to withdraw the spin-off proposal.

American Capital listened. Within days, American Capital unveiled a strategic review, including a sale of part or all of the company.

One reason for the about-face was likely its incorporation status in Delaware, which made the board vulnerable to annual election. Incorporation in Maryland, utilized by other BDCs, is considered more favorable to management, in part because the election of boards is often staggered.

Although American Capital had shrunk its investment portfolio in recent quarters, it had participated in the market until recently.

Among recent deals, American Capital helped arrange in November a $170 million loan backing an acquisition of Kele, Inc. by Snow Phipps Group. Antares Capital was agent. In June 2015, American Capital was sole lender and second-lien agent on a $51 million second-lien loan backing an acquisition of Compusearch Software Systems by ABRY Partners. — Abby Latour

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European CLO issuance dips in May as market remains muted

European CLO issuance

Three collateralized loan obligation vehicles priced in May, for a total of €1.13 billion, according to LCD, an offering of S&P Global Market Intelligence.

This activity compares with €2.4 billion last May, €890 million in May 2014, and €750 million in May 2013. Overall European issuance in 2016 stands at €5.57 billion from 14 transactions. – Sarah Husband

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Senate hearing opens discussion on BDC regulation changes

A hearing by the Senate banking committee showed bi-partisan agreement for BDCs as a driver of growth for smaller U.S. companies, but exposed some rifts over whether financial companies should benefit from easier regulation.

BDCs are seeking to reform laws, including allowing more leverage of a 2:1 debt-to-equity ratio, up from the current 1:1 limit. They say the increase would be modest compared to existing levels for other lenders, which can reach 15:1 for banks, and the low-20x ratio for hedge funds.

A handful of BDCs are seeking to raise investment limits in financial companies. They argue that the current regulatory framework, dating from the 1980s when Congress created BDCs, fails to reflect the transformation of the U.S. economy, away from manufacturing.

BDCs stress that they are not seeking any government or taxpayer support.

They are also seeking to ease SEC filing requirements, a change that would streamline offering and registration rules, but not diminish investor protections.

Ares Management President Michael Arougheti told the committee members in a hearing on May 19 that although BDCs vary by scope, they largely agree that regulation is outdated and holding back the industry from more lending from a sector of the U.S. economy responsible for much job creation.

“While the BDC industry has been thriving, we are not capitalized well enough to meet the needs of middle market borrowers that we serve. We could grow more to meet these needs,” Arougheti said.

In response to criticism about expansion of investment to financial services companies, the issue of the 30% limit requires further discussion, Arougheti said.

The legislation under discussion is the result of lengthy bi-partisan collaboration and reflects concern about increased financial services investments, resulting in a prohibition on certain investments, including private equity funds, hedge funds and CLOs, Arougheti added.

“There are many financial services companies that have mandates that are consistent with the policy mandates of a BDC,” Arougheti added.

Senator Elizabeth Warren (D-MA) raised the issue of high management fees of BDCs even in the face of poor shareholder returns. Several BDCs have indeed moved to cut fees in order to better align interests of shareholders and BDC management companies.

She said that Ares’ management and incentive fees have soared, at over 35% annually over the past decade, outpacing shareholder returns of 5%, driving institutional investors away from the sector, and leaving behind vulnerable mom-and-pop retail investors. Arougheti countered by saying reinvestment of dividends needed to be taken into account when calculating returns, and said institutional investors account for 50–60% of shareholders.

Warren said raising the limit of financial services investment to 50%, from 30%, diverts money away from small businesses that need it, while BDCs still reap the tax break used to incentivize small business investment.

“A lot of BDCs focus on small business investments and fill a hole in the market. A lot of companies in Massachusetts and across the country get investment money from BDCs,” said Warren.

“If you really want to have more money to invest, why don’t you lower your high fees and offer better returns to your investors? Then you get more money, and you can go invest it in small businesses,” Warren said.

Brett Palmer, President of the Small Business Investor Alliance (SBIA), said the May 19 hearing, the first major legislative action on BDCs in the Senate, was a step toward a bill that could lead to a new law.

“There is broad agreement that BDCs are filling a critical gap in helping middle market and lower middle market companies grow. There is a road map for getting a BDC bill across the finish line, if not this year, then next,” Palmer said, stressing the goal was this year.

Technically, the hearing record is still open. The Senate banking subcommittee for securities and investment could return with further questions to any of the witnesses. Then, senators can decide what the next stop will be, ranging from no action to introduction of a bill.

Pat Toomey (R-PA) brought up the example of Pittsburgh Glass Works, a company that has benefited from a BDC against a backdrop that has seen banks pulling back from lending to smaller companies following the financial crisis, resulting in a declining number of small businesses from 2009 to 2014.

The windshield manufacturer, a portfolio company of Kohlberg & Co., received $410 million in financing, of which $181 million came from Franklin Square BDCs.

“Business development companies have stepped in to fill that void,” Toomey told the committee hearing. “For Pittsburgh Glass, it was the best financing option available to them.”

FS Investment Corp.’s investment portfolio showed a $68 million L+912 (1% floor) first-lien loan due 2021 as of March 31, an SEC filing showed.

Arougheti cited the example of OTG Management, a borrower of Ares Capital. OTG Management won a contract to build out and operate food and beverage concessions at JetBlue’s terminal at New York airport JFK, but was unable to borrow from traditional senior debt lenders or private equity firms due to its limited operating history.

Ares Capital’s investment in OTG Management included a $24.7 million L+725 first-lien loan due 2017 as of March 31, an SEC filing showed. — Abby Latour

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After Downsize, Apollo Prices €357M CLO via Barclays; YTD

Apollo has priced its €357 million ALME Loan Funding V CLO via Barclays Capital, according to market sources. The AAAs are understood to have priced at a 145 bps discount margin.

The transaction is structured as follows:

The transaction was downsized ahead of pricing, amid widespread concern from CLO managers across the market about how tough the collateral-sourcing environment is currently.

For Volcker the transaction will include voting, non-voting, and non-voting exchangeable tranches.

Compliance with European retention regulation is via the sponsor route, with Apollo holding a vertical strip.

The manager priced its previous European transaction in November via Deutsche Bank, and this latest deal marks its fifth European CLO 2.0. — Sarah Husband

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Leveraged Loans: Herbert Park CLO amends transaction as to be Volcker Compliant

Noteholders of GSO/Blackstone’s Herbert Park CLO have been advised that the issuer has amended the transaction documents to enable it to comply with Volcker, by allowing the rated notes to be held in any one of three sub-classes; Collateral Manager (CM) Voting Notes, which will have voting rights with respect to manager removal and replacement, CM Non-Voting Notes, and CM Exchangeable Non-Voting Notes, which will not include voting rights.

The latter class of notes is also exchangeable into CM Voting notes or CM Non-Voting notes. The changes were effective as of May 9.

This follows a similar Volcker-related amendment to Richmond Park CLO.

Both Herbert Park and Richmond Park priced in 2013 ahead of the Volcker Rule coming into effect in 2014.

Last year, ICG sought to Volckerize two of its European CLOs—St. Paul’s II and III—via amendments, while Carlyle amended the AAA tranche on CGMSE 2013-1 CLO and Cairn Volckerized Cairn CLO III via refinancing exercises. — Sarah Husband

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Apollo Prices $474M ALM XIX CLO via Citi; YTD US Issuance: $15.42B

Citi today priced a $473.55 million CLO for Apollo Credit Management, according to market sources.

Pricing details are as follows:

As previously reported, up to 4% of the portfolio can be loans purchased under a price of 50, according to marketing documents. Up to 60% of the loans can also be covenant-lite.

The transaction closes on June 16, with the non-call period ending on Jan. 15, 2019, and the reinvestment period ending on Jan. 15, 2021. The stated maturity is July 15, 2028.

Year-to-date issuance now stands at $15.42 billion from 37 CLOs, according to LCD data. Note that static-pool CLOs are now counted in the volume totals. May volume is $1.28 billion from three transactions. — Andrew Park

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This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.