Deutsche Bank Markets $350 Million CLO as Garrison Seeks Higher Leverage
The Deutsche Bank logo
Hannelore Foerster/Bloomberg
The Deutsche Bank AG logo at one of the bank's branches in Frankfurt, Germany.
The Deutsche Bank AG logo at one of the bank's branches in Frankfurt, Germany. Photographer: Hannelore Foerster/Bloomberg
Deutsche Bank AG is arranging a $350 million collateralized loan obligation to refinance existing debt investments managed by Garrison Investment Group LP that would boost leverage and equity returns, according to people familiar with the negotiations.
The new structure will be put together from $450 million of assets in two Garrison CLOs, a form of collateralized debt obligation that bundles high-yield, high-risk loans and slices them into securities of varying risk, said the people, who declined to be identified because the terms are private. The new CLO will be three times levered and returns on the equity part would increase by 2 to 3 percentage points, the people said.
Deutsche Bank follows Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc. in trying to restart CLO issuance after sales dropped by 99 percent last year from a record $91 billion in 2007, when securities that repackaged debt paid for two-thirds of the biggest leveraged buyouts ever. CLO sales this year rose just above the 2009 low as junk-rated borrowers seek to refinance $468.3 billion of loans and private-equity firms tap banks to pay for a fivefold increase in LBO transactions.
“Any deal happening is a positive in this market,” said Vishwanath Tirupattur, a credit analyst at Morgan Stanley in New York. “Subdued new issuance of CLOs certainly poses challenges for refinancing LBOs. We have argued in the past that it is CLOs that put the ‘L’ in LBOs.”
Banks sold three CLOs for $1.3 billion in the U.S. this year as prices of the safest portions in the securities rallied 32 percent to 91 cents on the dollar in July from their record low in April 2009, according to Morgan Stanley data. That compares with $1.22 billion of CLO issuance in all of last year. The New York-based bank estimates $5 billion to $10 billion of CLO sales this year, Tirupattur said.
LBO Deals
Speculative-grade companies repaid $101.9 billion of loans since 2008, according to Bank of America Merrill Lynch data. Borrowers face a so-called maturity wall that runs through 2017 with $394.8 billion due through 2014, the data show.
Private-equity firms led by Washington-based Carlyle Group, Silver Lake of Menlo Park, California, and New York’s Warburg Pincus LLC are acquiring companies at the fastest pace since 2008, according to data compiled by Bloomberg. They’re also seeking the biggest leveraged loans slated for LBOs since Lehman Brothers Holdings Inc. collapsed in September 2008 to pay for $46.6 billion of acquisitions, Bloomberg data show.
NBTY Inc., the maker of Nature’s Bounty nutritional supplements being bought by Carlyle, is seeking a $1.5 billion term loan for the acquisition, the largest such obligation in almost two years, according to Bloomberg data. Interactive Data Corp., the Pearson Plc unit that provides financial market data and services, took out a $1.33 billion term loan for its buyout by Silver Lake and Warburg Pincus, exceeding IMS Health’s $1.25 billion LBO debt that priced in February.
Institutional Loan Issuance
Institutional investors, or non-bank lenders such as CLOs, mutual funds and hedge funds, bought $81.1 billion of high-yield loans this year, up from $38 billion in all of 2009, according to Barclays Capital, the investment banking division of Barclays Plc. Banks have agreed to raise $17.7 billion more of the debt, the data shows.
High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Garrison, a New York-based investment firm with $2.5 billion of total assets under management, joins Tetragon Financial Group Ltd. and a San Francisco-based unit of Nuveen Investments Inc. in seeking CLO investors. The three companies plan to raise a combined $1.15 billion.
Garrison CLO Spreads
The interest rate on the AAA rated, or highest investment- grade, part that will make up 64 percent of the Garrison CLO is being negotiated at 2.25 percentage points to 2.5 percentage points more than the London interbank offered rate, the people familiar with the talks said.
At the beginning of this month, AAA rated CLO portions traded at a spread of 2.45 percentage points over the lending benchmark, down from a high of 4.25 percentage points during the past year, according to Morgan Stanley data. The margin got as tight as 2.05 percentage points over the last year.
The Garrison transaction would also include a 5 percent AA rated portion at a margin of 4 percentage points to 4.5 percentage points over Libor, the rate banks charge to lend to each other. Another 5 percent of A rated portion will pay an interest 5.5 percentage points to 6 percentage points over the lending benchmark, the people said.
Investors will get a one-year call protection on the CLO maturing in 2017, or no later than 2018, the people said. Deutsche Bank, which plans to buy some of the highest-rated portion, is marketing the deal to investors worldwide including banks, insurance companies and other CLOs, they said. Garrison will be the sole equity investor in the CLO, which will be issued at face value. The obligation may be called Garrison CLO 2 Ltd., according to one of the people.
Loan Portfolio
The assets in the portfolio include middle-market and broadly syndicated leveraged loans, the people said. None of the debt is covenant-lite and the package doesn’t include loans that financed the so-called mega-LBOs, they said. Covenant-lite loans don’t have any financial maintenance requirements.
The weighted average discount margin, which also takes into effect the difference between market prices for the loans and face value, will be about 6.5 percentage points to 7 percentage points more than Libor.
Citigroup priced a $525 million CLO overseen by WCAS Fraser Sullivan Investment Management LLC in March in a transaction that refinanced an existing investment and increased its size by more than 50 percent. The New York-based bank also arranged a $325 million CLO for Leon Black’s Apollo Management LP in May. That month, Goldman priced a $450 million CLO for manager Doral Money Inc., with Babson Capital Management LLC as the collateral adviser.
Symphony CLO
Bank of America is arranging a $300 million CLO for Tetragon’s LCM Asset Management LLC. Nuveen’s Symphony Asset Management LLC had tapped the Charlotte, North Carolina-based bank as the underwriter for a $500 million obligation. Goldman Sachs is now marketing the deal, according to Barclays Capital.
“Recently we have seen a few new-issue CLOs, including a partial refinancing,” said Gautam Kakodkar, a credit strategist at Barclays Capital in New York. “While the current asset- liability arbitrage and the resulting equity returns are not yet compelling, the transactions could provide a blueprint for a gradual recovery.”
To contact the reporter on this story: Emre Peker in New York at epeker2@bloomberg.net.
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