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Permira’s first CLO to weather the storm

Despite difficult market conditions, RBS managed to price PDM CLO I, the first CLO of leveraged loans for Permira Debt Managers, a top European private equity house. That a new manager should be introduced at this point in the cycle is extraordinary and defies the many critics who say this is not the time to bring new names to the market.

Nonetheless, the deal was completed at what appears to be clearing levels, paying testimony to the quality of both the manager and the arranger.

Permira‘s success in pricing a CLO at this difficult time underscores the fact that, as one of the biggest European private equity houses, it sees all leveraged loan deals and therefore has the luxury of turning many down.

This is simply not an option for other less experienced or less well placed managers. The reality is that many managers are obliged to take down what their respective arrangers show them, at least this had been the case up until the summer crisis.

Another key factor, likely to have worked in Permira’s favour, is its collective leverage loan experience. CIO Peter Combe joined the firm from Lehman Brothers last year with fellow Lehman man James Greenwood. They have both been in the market for more than 20 years.

“If you invest in a CLO you want a manager who has experienced a recession,” Combe said.

Corporate defaults are widely expected to rise from last year’s artificial low point of zero back towards the long-term average, and possibly higher. This environment is expected to see an investor flight to quality which, in theory at least, should benefit Permira. “We look forward to working in tough market conditions. It’s not a bad thing,” Combe said.

Ramping PDM CLO 1 began as early as February, though the manager slackened up and stopped buying altogether when leverage multiples began to rise more steeply as the year progressed. However, it has recently re-commenced the ramping up process.

Defying critics who claim the deal is one of the so-called “walking dead”, where the arbitrage simply does not work, Combe insisted that “we came at the CLO with a spread focus – the arbitrage works.” He went on to say that the highly selective portfolio sat well with investors, given the expected rise in corporate defaults.

The €208m Aaa/AAA (Moody’s and S&P) rated A Class of PDM CLO I with a 9.3-year WAL was pre-placed and no spread was disclosed. The €11.25m Aa2/AA rated B Class priced at plus 125bp, which compared with a discount margin of plus 150bp for ICG’s Eurocredit VIII (see below).

The €17.25m A2/A rated C Class, priced at plus 250bp, which was in line with the ICG deal. The €16.5m Baa3/BBB– rated D Class priced at plus 425bp, some 33bp inside ICG’s deal, while the €13.5m Ba3/BB– rated E class came at plus 600bp, 99bp inside the ICG deal.

Apart from the A class, the WAL on all other pieces is 10.3 years. The deal features a seven-year reinvestment period, a six-month ramp up period, and a weighted average portfolio rating of B+. It will comprise a minimum 80% senior secured loans and a maximum 20% mezzanine, high-yield, PIK and senior unsecured loans.