NEW YORK, April 9 (LPC) - AGL Credit Management is seeking to reinvest distributions that would have been paid to the most junior investors in its US Collateralized Loan Obligation (CLO) in order to buy new loans, creating a unique structure amid market volatility caused by the coronavirus pandemic.
The asset manager’s AGL Core CLO 4, which it is raising with Barclays, will deposit all cash distributions from the equity tranche during the fund’s one-year reinvestment period into a ‘principal collections account’ to purchase additional loans, according to three sources. Such loans are now trading at a discount.
CLOs pay their debtholders a set rate plus three-month Libor using interest payments received from their investment companies. Equity investors, the holders of the riskiest and most junior piece of the fund, collect the interest remaining after bondholder distributions are complete. CLOs are the biggest buyers in the US$1.2trn US leveraged loan market.
“The current market environment enables CLO managers to buy loans at materially discounted dollar prices. If the manager is good at selecting the right sectors and loans, then a good chunk of those loans bought at a discount could pay off at par,” said Jason Merrill, an investment specialist at Penn Mutual Asset Management. “This new feature of turning equity distributions into dry powder for buying loans at discounted prices ... will enhance the CLO manager’s ability to build par, which is good for both debt and equity investors.”
The fund is a bright spot for the US CLO market, which shut down for the second half of March as the fast-spreading virus interrupted supply chains and forced retail operations to close, pushing companies to fire workers or put them on leave.
Amid market volatility, CLO tranche spreads widened, and loan prices dropped dramatically.
The LPC 100, a cohort of the 100 most liquid US loans, dropped more than 21% from the start of the year to 77.87 cents on the dollar on March 23, an almost 11-year low. The benchmark rebounded to 90.07 cents Wednesday.
AGL was founded in 2019 by Peter Gleysteen, the firm’s chief executive officer, and Thomas H. Lee, its non-executive chairman, who previously served as chairman of buyout shop Thomas H. Lee Partners.
The firm’s initial institutional investment partners include a subsidiary of the Abu Dhabi Investment Authority and an unidentified US state pension fund, which together committed US$650m of equity, according to a news release last year. The family office of Thomas H. Lee also invested in AGL.
The AGL Core CLO 4, which will be compliant with European Union risk-retention rules, includes two Triple A tranches -- US$248m and US$20m in size -- and the equity slice, which is US$123.6m, one of the sources said.
The CLO, which has a non-call period expiring in October, is scheduled to price next week.
Spokespeople for AGL and Barclays both declined to comment. (Reporting by Kristen Haunss. Editing by Michelle Sierra)