Duchess CLO sets record levels

Despite spread widening in the corporate and RMBS primary markets, CDOs of leveraged loans apparently remain immune to negative sentiment. The latest CLO to price at record tight levels is Duchess IV, a €525m transaction from Babson Capital Europe.

Arranged by Citigroup, the deal was increased twice from the original €400m that was marketed, thanks to strong underlying demand. The fourth transaction in the Duchess series was also the first since Babson Capital Management bought Duke Street Capital Debt Management in May 2004. Babson is still managing the first three Duchess deals, the first of which is now four years into its seven-year reinvestment period.

Coming in at the tight side of price talk, Triple A notes with a 9.2-year average life cleared at three-month Euribor plus 24bp. That was 1bp outside one of the Triple A tranches from Mizuho’s Harvest II CLO, but inside Harvest II’s average Triple A pricing of plus 24.8bp.

Lower down the structure, Duchess IV really stood out from the crowd. Class E notes with a Double B rating (from just S&P) and an average life of 14.6 years priced at three-month Euribor plus 475bp. Slightly shorter Double B notes from Harvest II came in at plus 550bp. Single A notes from Duchess IV came at plus 60bp, against plus 62bp from Harvest II and plus 62bp from Carlyle.

Duchess IV was broadly distributed, even in the Triple A category, according to Stephanie Mathern from Citigroup’s structured credit syndicate. “We had a mix of old and new investors, and overall the deal was very well received,” she said. “The equity was heavily oversubscribed and the debt was up to 2.5 times oversubscribed in some cases.”

The paper was distributed in the US, Asia and Europe to the full spectrum of investors, including banks, insurance companies, asset managers and private banks. Duchess IV targeted 85% senior secured loans and a 15% mezzanine bucket. The deal will be between 65% and 70% ramped at close on May 19, and is expected to be fully invested within the next six months.

Up to 30% of the portfolio can be invested in sterling-denominated loans, giving Babson access to a wider selection of businesses. The manager can do this in an efficient manner by using a portfolio currency hedge strategy, for which credit is given by the rating agencies.