Duke Street increases CDO

Duke Street Capital Debt Management has increased the size of its first collateralised debt obligation (CDO) fund, Duchess 1, to EURO1 billion. The EURO750 million raised for the fund last June made it Europe’s largest CDO.

The increase will be implemented through a tap issue, offering both new and existing investors the opportunity to buy shares. The issue has been arranged by the fund’s sponsor, CIBC World Markets. Ian Hazelton, chief executive of Duke Street Capital Debt Management, says Duke Street continues to break new ground, as this is the first time a tap issue has been used by a CDO. He said raising fresh capital was cheaper and more efficient using a tap, compared to the alternative of a new fund.

The extra EURO250 million, which Hazelton expects to have invested by May, will be used to purchase additional debt assets, principally senior secured loans. This will tilt the CDO’s asset mix in favour of senior loans, which will account for at least 75 per cent of the fund’s investments, compared to the previous goal of 65 per cent. Hazelton said: “Our experience investing the first half of the fund led us to increase the proportion of senior secure loans, as they currently offer better relative value and give us an increased competitive advantage.” He added that mezzanine deal flow has been quiet and these assets account for just ten per cent of the fund. Hazelton maintains he will also be cautious with the high yield bond allocation, which currently represents 15 per cent of the portfolio.

In consequence of the new asset split Standard & Poor’s upgraded the rating on the B notes, which Hazelton says have proved very popular with institutional investors, from BB to BB+. “The upgrade shows the credit quality is good and that we’ve improved the level of securitisation in the structure,” Hazelton said.

So far 84 per cent of the fund has been committed to around 45 deals, with no losses or defaults: “We have been very pleased with both the rate of the ramp-up, the quality of the assets acquired, and the fund’s performance to date.” Deals include Baxi, Cognis, Leisure Link, United Biscuits (which has now been re-financed) and Klckner Pentaplast, although that allocation has yet to be confirmed.

According to Hazelton, preparations for Duchess II are reasonably advanced and an undisclosed sponsor has been appointed.