Carlyle Group won an auction for the management contracts of four collateralized loan obligations overseen by Mizuho Alternative Investments LLC’s U.S. loan management business Mountain Capital Advisors.
The funds consist of $1.2 billion of leveraged loans, according to Linda Pace, a managing director at Carlyle. Structured-credit advisory firm GreensLedge Group LLC was hired by Mizuho to sell the business.
“This is part of our ongoing efforts to deepen and broaden our credit alternatives platform,” Pace said.
This is the second loan fund auction Washington-based Carlyle has won this year, as the safest portions of the CLO, those rated AAA by Standard & Poor’s, traded at 91.5 cents on the dollar Sept. 16, after hitting a low of 69 cents in April 2009, according to Morgan Stanley data. It previously bought $5.1 billion of leveraged loans and other credits managed by Stanfield Capital Partners LLC. The world’s second-largest private-equity firm is also looking to invest in hedge funds.
CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return. The loans they buy are used to back acquisitions and leveraged buyouts, including the purchase of Burger King Holdings Inc. by 3G Capital.
Mizuho previously sold its loan management business in Europe to 3i Group Plc, according to a Sept. 27 news release.
Masatoshi Muto, chief executive officer of Mizuho Alternative Investments, declined to comment.
The market for CLOs is restarting after collapsing in 2007. This year through August, $1.3 billion of U.S. CLOs backed by widely syndicated loans have been issued, compared with $1.22 billion for all of last year, Morgan Stanley data show. In 2007 about $91.1 billion of that type of CLO was issued in the U.S. GSO Capital Partners LP, the credit investment arm of Blackstone Group LP, and Apollo Global Management LLC are currently trying to raise CLOs.
Many CLOs stopped paying some fees to their managers during the credit crisis and stopped some cash distributions to holders of the lowest portion of the structures. At its worst, 75 percent of all CLOs in the U.S. had some type of cash-flow diversion for at least a quarter or two, according to Citigroup Inc. data.
After the S&P/LSTA U.S. Leveraged Loan 100 Index posted a 52.2 percent return last year and 7.4 percent year-to-date, managers began to receive fees cut off during the financial crisis. Eighty percent of U.S. CLO equity holders are receiving a full distribution of cash and another 10 percent are receiving partial distributions, according to an Oct. 12 report from Citigroup.
Generators of Income
“The question is, how much are you making from the CLOs,” said Gene Phillips, a director at PF2 Securities, a consulting firm in New York. “While they have proved to be steady, they are not massive generators of income. If you only have one or two, it can be difficult to support a business. It may depend on how your other investment activities are panning out.”
Managers may have held off selling their firm or portfolios until CLOs improved enough so that they started paying their subordinated fees again, which could gain them a higher sale price, Phillips said.
GSO purchased Callidus Capital Management LLC, a leveraged-loan unit of Allied Capital Corp. with about $3.2 billion in assets under management, earlier this year, according to a news release. Primus Guaranty Ltd. sold its asset-management unit to Commercial Industrial Finance Corp. last month. Primus agreed to buy CypressTree Investment Management LLP in 2009.
“It’s a question of critical mass,” Phillips said. “Are you making enough money from the CLO business to keep running it.”