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CLO Round-up: With SEC clarity re risk-retention (finally), an active week

global CLO volume

After a sluggish start to the month, it was an active week in the U.S., both in terms of new issues and on the regulatory front. Four U.S. new-issue transactions priced, while in Europe, AXA Investment Managers priced the third deal of the month, a €362.3 million transaction, via J.P. Morgan. Through Friday, July 24, global issuance rises to $73.67 billion.

The SEC provided much-awaited guidance that CLOs issued prior to Dec. 24, 2014 – the date the final risk-retention rule was published – will be able to refinance debt tranches under certain conditions after the rule takes effect in December 2016 without being subject to risk retention. The SEC’s position is reflected in a July 17 no-action letter in response to a request from Crescent Capital Group. It provides the market with clarity around the refinancing issue, which has been a topic of discussion since the final risk-retention rule was first published in October 2014. – Kerry Kantin/Isabell Witt

Year-to-date statistics, through July 24, are as follows:

  • Global issuance totals $73.67 billion
  • U.S. issuance totals $63.94 billion from 120 deals, versus $71.11 billion from 133 deals during the same period last year
  • European issuance totals €8.75 billion from 22 deals, versus €6.92 billion from 16 deals during the same period last year

 

This analysis is taken from a longer LCD News story, available to subscribers here, that also details

  • Recently priced CLOs
  • CLO pipeline
  • US CLO volume/outstandings
  • European CLO volume/outstandings
  • European priced CLOs

 

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BDC Carey Credit Income Fund launches public capital raise

W. P. Carey’s new non-traded business development company, Carey Credit Income Fund (CCIF), has begun to raise capital through its initial feeder fund Carey Credit Income Fund 2016 T. The feeder fund aims to raise roughly $1 billion at an initial offering price of $9.55 per share, according to an SEC filing.

CCIF will focus on investing in senior debt of large, privately negotiated loans to private middle market companies in the U.S., typically with EBITDA of $25-100 million and annual revenue ranging from $50 million to $1 billion. The fund may also invest in broadly syndicated bank loans and corporate bonds and other investments.

Carey Credit Advisors, an affiliate of W. P. Carey, is the advisor to CCIF, and Guggenheim Partners Investment Management, an affiliate of Guggenheim Partners, is the sub-advisor. W. P. Carey and Guggenheim have each made a $25 million initial capital investment in CCIF.

NYSE-listed W. P. Carey Inc. is an independent equity real estate investment trust with an enterprise value of around $11.2 billion. Guggenheim Partners is a privately held global financial services firm with more than $240 billion in assets under management as of March 31. – Jon Hemingway

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Hostess tightens pricing on $1.25B leveraged loan backing recap/dividend to apollo

A Credit Suisse-led arranger group is seeking commitments by 5 p.m. EDT today on the first- and second-lien dividend recapitalization financing for Hostess Brands after offering issuer-friendly changes to the deal, including tightening pricing and adding pre-cap language to the transaction, according to sources.

The spread on the first-lien term loan firmed at L+350, the tight end of L+350-375 guidance, and the offer price was tightened to 99.75, from 99.5. The 1% LIBOR floor is unchanged.

The second-lien also firmed at the tight end of the initial L+750-750 range, while the arrangers tightened the OID to 99.5, from 99. The 1% floor is unchanged.

As revised, the first-lien offers a yield to maturity of about 4.62%, while the second-lien would yield about 8.87%, which compares with 4.67-4.93% and 8.96-9.23% at the original guidance, respectively.

Credit Suisse, UBS, Deutsche Bank, Morgan Stanley, RBC Capital Markets, and Nomura are arranging the deal.

In addition, the leads shifted $100 million to the first-lien term loan from the second-lien. As revised, the deal includes a $100 million revolver; a $925 million, seven-year first-lien term loan; and a $300 million, eight-year second-lien term loan.

The issuer is rated B/B2. Prior to the shift in funds, the first-lien drew B+/B1 ratings and the second-lien drew CCC+/Caa1 ratings, with 2H and 6 recovery ratings from S&P, respectively.

The term loans will be covenant-lite. As before, the first-lien term loan is set to include six months of 101 soft call protection, and the second-lien loan will be callable at 102 and 101 in years one and two, respectively.

The recap loan follows news that the issuer – which is controlled by Apollo Global Management and Dean Metropoulos – took the company off the auction block and was instead preparing to pursue an initial public offering. The dividend is roughly $905 million. – Kerry Kantin/Chris Donnelly 

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Ares Management announces merger plan with Kayne Anderson

Alternative asset manager Ares Management announced today that it is merging with energy specialist Kayne Anderson Capital Advisors. The combination will be renamed Ares Kayne Management. The firms had a combined $113 billion of assets under management as of March 31.

Total consideration is $2.55 billion. Ares plans to pay around $1.8 billion with partnership units and the $750 million balance in cash, which will be funded with new debt, according to a presentation. The deal is expected to close around Jan. 1, 2016, subject to regulatory approvals.

The combined business will invest across five groups: tradable credit, direct lending, energy, private equity, and real estate. However, the two companies will continue to manage their existing funds and operate under existing brand names, according to a statement.

Ares Kayne will have roughly 450 investment professionals in more than 20 offices globally. Kayne Anderson alone has around 110 investment professionals in eight U.S. offices managing investments in energy and energy infrastructure, specialty real estate, middle market credit and growth private equity. Substantially all non-energy personnel will join Ares’ existing private equity, real estate,and direct lending groups, the firms said.

Both Richard Kayne, the founder and chairman of Kayne Anderson, and Ares chairman and CEO Tony Ressler will serve as co-chairmen of the new entity. Kayne’s president and CEO Robert Sinnott will become chairman of a newly formed energy group at Ares Kayne. Sinnott and Kayne’s Kevin McCarthy will join the board. Sinnott, McCarthy, and Al Rabil will join the management committee. Ressler, Michael Arougheti, and Michael McFerran will remain in their respective roles as CEO, President, and CFO. – Jon Hemingway

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Leveraged loan funds report third consecutive week of inflows

Leveraged loan funds reported inflows of $208 million for the week ended July 22, following inflows of $34 million and $19 million in the previous two weeks, which reversed a five-week outflow streak worth a combined $1.2 billion, according to Lipper.

This week’s result was attributed to a $168 million inflow to mutual funds, along with a $40 million inflow to the ETF segment. In contrast, last week’s $34 million inflow came from a $37 million inflow to ETFs offset by a $3 million outflow from mutual funds.

With today’s net inflow, the trailing four-week average improves to negative $26 million, from negative $122 million last week and negative $208 million two weeks ago.

The year-to-date outflow is now $3.9 billion, with 2% tied to ETFs, versus an inflow of $352 million at this point last year that was roughly 216% tied to ETFs.

In today’s report, the change due to market conditions was negative $98.5 million, which is essentially nil against total assets, which were $93.3 billion at the end of the observation period. The ETF segment comprises $6.8 billion of the total, or approximately 7% of the sum. – Joy Ferguson

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Antares Capital seeks $13.9B credit package in purchase by CPPIB from GECC

Credit Suisse, Deutsche Bank, and Citigroup are holding a lender meeting on Monday, July 27, at 11 a.m. EDT to launch the syndication of $13.9 billion of debt facilities in connection with Canada Pension Plan Investment Board’s purchase of Antares Capital from General Electric Capital Corp.

Financing will include two credit facilities: A $3.2 billion holdco credit facility and a $10.7 billion asset-based credit facility. The holdco senior secured credit facilities will include a $2 billion, five-year revolving credit and a $1.2 billion, five-year amortizing A term loan. Pricing on the senior secured holdco credit facilities will be tied to a ratings-based grid. The holdco facilities will carry two maintenance covenants, a total-net-asset-value test and an adjusted-asset-ratio test. The term loan will amortize at 5% in year one, 7.5% in year two, 10% in year three, and 12.5% each in years four and five with the balance due at maturity, according to sources.

The lead arrangers are also syndicating $10.7 billion of seven-year senior secured asset-backed credit facilities, comprised of a $3 billion asset-based revolving credit and a $7.7 billion, asset-based secured term loan. The asset-backed credit facilities will be secured by a portfolio of predominately first-lien senior secured term loans originated by Antares Capital. The facilities will have an equity cushion of 20% of the total portfolio value, with additional protections from traditional cash-trapping mechanics, revaluation events, and events of default that will provide remedies to the lenders.

Proceeds from the two credit facilities will be used to fund CPPIB’s announced acquisition of Antares Capital’s middle market sponsor finance business, including its integrated origination, underwriting and distribution platform, and to fund future growth.

CPPIB is contributing approximately $4 billion of equity to the transaction, according to sources. The business would be on a strong footing going forward; AAA rated CPPIB is one of the largest 10 managers of retirement funds globally, with about C$265 billion of assets under management.

Commitments will be due on Aug. 12, sources said.

GE Capital has long reigned as the dominant player in the middle market lending, defined by LCD as lending to companies that generate EBITDA of $50 million or less, or $350 million or less by deal size, although definitions vary among lenders.

Going forward, Antares Capital will operate as an independent business, and retain the name. Managing partners David Brackett and John Martin, who have led Antares since its formation, will continue to lead the stand-alone business. The sale is expected to close in the third quarter.

The sale accounts for $11 billion of ending net investment. GE Capital has announced sales of roughly $55 billion in all, and plans to complete $100 billion of sales this year. GE announced in April it would divest GE Capital, including its $16 billion sponsor finance business. GE Antares specializes in middle market lending to private-equity backed transactions. – Chris Donnelly

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Leveraged loan fund assets under management hit two-year low

loan fund assets under management

After eking out two months of growth, loan mutual funds’ assets under management declined $2.9 billion in June – the biggest drop since January – to a two-year low of $135.6 billion, from $138.5 billion a month earlier, according to data from Lipper FMI and fund filings.

The reason? institutional investors in June adopted a low-wattage risk-off posture across risk assets, amid growing tensions surrounding the Greek debt situation. (Early data from July suggests that loan fund assets are stabilizing.) – Steve Miller

Follow Steve on Twitter for leveraged loan market news and analysis.

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CLOs: A Volcker Rule primer ahead of tomorrow’s compliance date

Non-Volcker compliant AAA CLO paper has widened in the secondary market over the past couple of months ahead of a key deadline arriving tomorrow that prohibits U.S. broker-dealers from making markets in non-compliant paper.

Morgan Stanley CLO research analysts, Richard Hill and Mia Qian, in their June CLO Market Tracker research report, estimate that the basis to Volcker compliant CLOs is now more than 50 bps, which in their view, is due to diminished liquidity in this paper.

For those of you not yet fed up with hearing about Volcker and its impact on the CLO market, here is a run through the key points:

The Volcker Rule effectively prohibits U.S. banks from holding ownership interests in “covered funds,” and a CLO that includes bonds in its collateral pool, and which is issued under Rule 3c-7, is classed as a covered fund. Under Volcker, ownership includes “the right to participate in the selection or removal of an investment manager” of the covered fund, outside of an event of default.

To be clear, tomorrow’s deadline only restricts U.S. broker-dealers from making markets in non-compliant CLO paper. Via an extension granted by the Federal Reserve last December, banks are still able to hold non-compliant CLO paper on their books through July 21, 2016 (with an additional extension through July 21, 2017 expected). However, this extension applies only to non-compliant paper held by banks as of Dec. 31, 2013, and thus, as of tomorrow, banks are no longer expected to trade or make markets in non-compliant paper, which has constrained liquidity in recent months.

There is a market-making exception that allows bank trading desks to trade non-compliant CLOs, but the exception contains two large impediments which could limit its use, according to Wells Fargo. “First, the bank faces a firm-wide limit for Volcker exceptions of 3% of Tier 1 capital; the bank then must decide how much of that exception to allocate to the trading desk. Second, any non-Volcker compliant tranches incur dollar-for-dollar capital charges against the banks’ Tier 1 capital,” the firm noted.

In terms of market impact, Wells Fargo analyst David Preston summarized in his February 2015 CLO Desktop Regulatory Guide research report that the majority of all CLO 1.0 deals should be paid off by 2017, that most post-2014 CLOs are Volcker compliant (i.e. do not include bond buckets), and so it’s the 2012 and 2013 vintage CLOs that are the issue, of which there was roughly $130 billion outstanding as of February this year.

Since the final version of the Volcker Rule was released in December 2013, CLO managers and their investors have been busy amending existing transactions to remove bonds. Some have done this via painstaking amendment processes with their investors, while others have used the CLO refinancing route to remove bonds, with 14 of the 22 refinancing transactions pricing so far in 2015 removing bonds via the process, according to LCD.

Although most players do not expect any further regulatory relief – there is the wild card of the “Barr bill” is still outstanding. Congressman Andy Barr has sponsored two Volcker-related bills – H.R. 37, or the ‘Volcker bill,’ which passed to the Senate earlier this year, and which includes a provision that would allow banks until July 21, 2019, to divest non-compliant CLO holdings – and H.R.1841. This latter bill was introduced in March and, while reintroducing the Volcker extension, also seeks to amend Section 13 of the Bank Holding Company Act of 1956, known as the Volcker Rule, to allow CLOs to have ownership interests in a hedge fund or private equity fund.

Still, one man’s loss is another’s gain and for investors that are not particularly concerned about liquidity, Morgan Stanley’s Hill and Qian think non-Volcker compliant legacy CLO AAA paper presents an attractive investment opportunity, given the much wider spread levels and relatively short weighted average life. – Sarah Husband

twitter icon Follow Sarah on Twitter for CLO market news and analysis.

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AssuredPartners’ buyout by Apax backed by BAML, RBC, MS

Bank of America Merrill Lynch, RBC Capital Markets, and Morgan Stanley have provided committed debt financing to back Apax Partners’ acquisition of insurance brokerage AssuredPartners from GTCR.

Sources indicate the debt financing will be U.S.-focused.

AssuredPartners is one of the largest insurance brokerage firms in the U.S. It was formed in 2011 as part of a strategic partnership between private equity firm GTCR and the company’s CEO and COO. It has offices in more than 30 states, the District of Columbia, and London. – Nina Flitman

 

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RAAM Global Energy extends deadline for bond exchange again

Struggling oil and gas exploration and production company RAAM Global Energy has extended an exchange offer for its 12.5% secured notes due 2015 by an additional week.

The exchange offer, which is for new 12.5% notes due 2019 and RAAM common stock, was due to expire on July 16. The new deadline is July 23.

So far, roughly $226.5 million in principal of the 12.5% secured notes due 2015, or 95.2% of outstanding notes, has been tendered, a statement said. The company has previously extended the deadline several times.

In April, RAAM Global Energy said it would enter into discussions with senior term loan lenders and bondholders after failing to pay a $14.75 million coupon on the bonds due 2015.

Standard & Poor’s cut RAAM Global Energy’s corporate credit rating to D, from CCC-, and the issue-level rating on the company’s senior secured debt to D, from CCC-, after the missed bond interest payment. A month later, the ratings were withdrawn at the company’s request.

RAAM Global Energy sold $150 million of 12.5% secured notes due 2015 in September 2010 through bookrunners Global Hunter Securities and Knight Libertas. Proceeds funded general corporate purposes. The bond issue was reopened by $50 million in July 2011 and by another $50 million in April 2013.

The company also owes debt under an $85 million first-lien term loan due 2016. Wilmington Trust is agent.

RAAM Global Energy Company’s production facilities are in the Gulf of Mexico, offshore Louisiana and onshore Louisiana, Texas, Oklahoma, and California. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.