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CIFC pulls trigger on secondary CLO strategy amid wider spreads

By Will Caiger-Smith

NEW YORK, Nov 25 (IFR) - Top loan investor CIFC Asset Management is rushing to raise new money to buy repackaged leveraged loan deals, sensing an opportunity for outsized returns as market volatility pushes spreads wider.

As loan prices have fallen over recent months, the lower rated debt and equity tranches of collateralized loan obligations have performed poorly, leading traditional holders like hedge funds and business development companies to sell.

That has pushed spreads wider, and other investors are picking up CLO equity and mezzanine tranches of existing deals at what they consider bargain prices, betting on spread tightening in 2016.

"It's difficult to call the bottom, but this is a very attractive entry point," Oliver Wriedt, co-president at CIFC, told IFR.

Wriedt reckons the performance of these securities is currently dislocated from the underlying loan market, and should begin to improve as issuance of new CLOs slows down in the months ahead.

Secondary spreads for post-crisis Double B-rated CLO bonds have gapped out to Libor plus 775bp-975bp compared to 600bp-660bp in May, according to Deutsche Bank research.

Double B rated leveraged loans, meanwhile, have moved from 385bp to 440bp over the same period.

"When new capital comes in next year and all the hedge funds reset, it's unlikely these bonds will stay this wide," said Wriedt.

NEW MONEY

CIFC is raising new money from institutions including pension funds and insurance companies for a closed-end fund focused on these investments, said a person close to the situation.

The New York-based firm already manages around US$14bn of loan-based assets, the majority in CLOs it issues itself.

CIFC is targeting a first close for the new fund in December this year. It will follow a hybrid private equity structure with a 2.5-year investment period and a five-year harvest, the person said.

The firm's strategy is in line with other CLO managers like Sankaty Advisors which have also increased their purchases of secondary CLO debt and equity over recent months.

PRIMARY SLOWDOWN

CLOs pool leveraged loans into managed portfolios which are tranched into debt and equity securities.

They are the largest buyers of leveraged loans. But signs of weakness in the loan market, such as Veritas's recently pulled LBO financing, have turned some CLO investors away from new issues.

Rising debt spreads and decreasing equity returns, combined with a shaky loan market and uncertainty around looming risk retention rules, have already dampened CLO issuance this year after a record-breaking 2014.

Issuance this year to date is US$91bn, compared to US$110bn at the same point last year, according to data from LPC Collateral. (Reporting by Will Caiger-Smith; Additional reporting by Kristen Haunss; editing by Shankar Ramakrishnan and Jack Doran)