--Libby Sallaberry
Highland Capital Management sees around 30 new issue collateralized loan obligation transactions occurring this year, as spreads continue to tighten and investor interest picks up, Gibran Mahmud, portfolio manager, told TSCI.
“In general, what’s attractive is high teens [for equity tranche returns],” said Mahmud. “You haven’t been able to get to that level because the arbitrage between the loan prices and the cost of debt isn’t quite there yet…we’re not terribly far away.” He said that he anticipated somewhere around 10 deals to be completed in the first half of 2010, and about 20 in the second half.
Highland last week announced that it closed its CLO Value Fund I, which launched in November 2008, four years ahead of time after a momentous rally in 2009. The fund invested in CLO tranches, mostly AAA and AA. “We felt it was more dislocation in credit markets than fundamental issues,” said Mahmud. “Loans were off, but even more so, CLOs were off.” The fund returned 138% at closing.
Investor demand, both for equity and AAA, is picking up, Mahmud noted. Some traditional investors, such as pension funds, are looking further down the capital structure than they did before. “A few pension funds stay at the top, but there are others that don’t mind using an opportunistic allocation,” he said. Structures would likely be 70% AAA, 10% mezzanine and 20% equity, he said. “There’s some banks that feel they can place mezz,” said Mahmud. A panel at ASF2010 also agreed that structures would be simplier, and fully ramped (TSCI, 2/3/10). He declined to comment on Highland’s specific plans in the CLO issuance space.