Dual Tranche Deals Come Out Of The CLOset

To combat a CLO market frozen stiff by a lack of new capi-
tal, price declines, and waning confidence, some firms are
working on new CLO portfolio strategies to bring in business
and keep current clients interested in the loan market.
Citigroup, Morgan Stanley, Natixis, JPMorgan, Pruden-
tial, Barclays and Deutsche Bank are some of the firms creat-
ing new CLO structures that have just two tranches, sources
said. In this structure, one tranche is all triple-A debt and the
other is equity—a nomenclature for unrated debt. These struc-
tures differ from the multi-tranche CLOs that helped balloon
the securities market to more than half a trillion. Those CLOs
had everything from mezzanine to tripIe-C tranches.
So far, these firms have not finalized a CLO using the two-
tranche structure, because the loan market is still frozen.
However, once the market thaws, demand for new products
will come from a new crop of investors, such as pension funds,
sources said.
Spokespeople for Prudential and Barclays declined to com-
ment, and calls to the other aforementioned firms were not
returned by press time.
"Many bankers we have spoken to tell us they want to struc-
ture deals with one triple-A tranche and one equity tranche, so
(See CLOs on page 4)

INSIDE THIS ISSUE Market Sezz: Where's the Mezz?

Editor's Note
Lev Finance Chief Leaves
Merrill For Ares Management
RBC Nabs JPMorgan Financial
Sponsor Veteran
Gnariy LCDX Goes Back To The 80s ....3
Itegra Telecom Seeks Buyback
CommScope Repays $150M,
Amends Agreement
Inflows into HY Funds Increase
Last year, more than $25 billion was
2
raised by roughly 30 mezzanine provid-
ers, according to data from Thomson
3
Reuters. While other lending sources
have effectively dried up amid the cred-
it crisis, one would think the mezzanine
3 market would be enjoying a renaissance
as one of the few financing options still
available. Such a scenario, however, has
3 yet to materialize.
"Very few private equity firms will
do a mezz and equity deal; they want
3 senior lending," said Andy Steuer-
3
man, a senior managing director with
Golub Capital. "If you can't get the
senior lenders interested, then you
have no transaction. That is the situ-
ation today."
Another factor is, quite simply, that
the deal market has effectively stalled.
Economic uncertainty, on top of the
credit woes, has both buyers and sellers
retreating to the sidelines until more
clarity emerges. For the most part, the
only deals being pursued are transac-
tions that are absolutely necessary for
(See MEZZ on page 5)

LyondellBasetl Files For Chapter 11 ....4

DATA
Most Recent Ratings Actions
Term Sheets
„ _ , . . , . „
Secondary Market Data
Closed End Fund Performers
Loanbase Statistics
Europe's Distress: Deals Find No Shoppers
With most credits trading at bar-
7 g^j^ p^j^^^^ jj^^ ^^^ y^^^ t>rings with
8-15 it a great time to shop for deals in the
,„ European leveraged loan market. This
16 . . , r i
has been the case for some months, ac-
16 tually, and looking ahead into 2009, ex-
16 P^«"^' ^^'^^''^ opportunities abound for
distressed debt investors. Yet no one has
really risen to the occasion, it seems, and
although there are stories of distressed
and special opportunities funds gearing
up for action, sources don't think they'll
make a serious move into leveraged
loans for some time to come.
"For various reasons, the distressed
market has been quiet over the past six
months and continues that way," said
Dan Hamilton, head of law firm White
& Case's financial restructuring prac-
tice. "Earlier in 2008, funds put their
(See DISTRESS on page 6)

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 BANK LOAN REPORT

vey any worry about the future of the weakness, the mezz market held strong.
MEZZ
mezz market. "Everyone came back And during the first two quarters of
continued from page 1
to mezz then, and the same thing will 2008, the percentage of mezzanine fi-
a company's survival. "We are telling occur again." nancing going into deals grew substan-
our clients to hang on, now is not the Like Steuerman, Hermsen alluded tially compared with the same period in
time to sell," one banker said. That in to the role the rest ofthe market will 2007, roughly doubling its average allo-
turn keeps the private equity market play. "The senior lenders aren't being cation within the capital structure.
stagnant, which effectively idles the very aggressive at all; we will be here "Prior to the chaos that started in
mezzanine providers, even if they're to fill the gap," he September 2008,
armed with billions of dollars worth of said. "The purchase the mezz mar-
dry powder. price multiples are ket was getting
For the few deals that are out there, becoming more at- 'Regular people can't stronger, and it
another factor is limiting the appeal tractive and pricing was starting to
of mezz financing—namely its price. is getting better." even get mortgages; shine. We were
Mezzanine financing has become cost- Babson is among how is a leveraged busy," said Mi-
ly, almost to the point that it rivals the those prepared for chael Klofas, a
equity portion ofthe deal. themarketrebound, buyout supposed to managing direc-
Last year, for instance, mezzanine having closed tor with Babson.
shops were pricing deals with IRRs its Tower Square
be oompleted?"
"But since Octo-
of between 15% and 18%, including Capital Partners ber, we are not
a pay-in-kind component—rates that 111 fund in Decem- seeing a lot of
were already considered high. Today, ber with $1.58 billion of capital under deal activity in general, and mezz deals
mezzanine tranches are being priced commitment. in particular have been few and far be-
between 16% and 20%, according to Mezz is undoubtedly a necessary tween."
Ronald Kahn, a managing director at part of the structure of current deals. Indeed, prior to September 2008,
Lincoln internationaL He adds that In fact, it is so important that many Tower Square III had already com-
mezzanine co-investments are now equity sponsors have raised their own pleted 13 transactions and deployed
almost always being replaced with mezzanine funds. Endeavour Capital, 11% of its capital under management.
warrants, and most deals also require a lower middle market firm, is trying Since then the fund has only com-
higher pre-payment penalties, often to raise between $200 million and $300 pleted one transaction, with three in
starting out with two-year no-call million for Endeavour Structured Eq- the pipeline.
provisions. uity and Mezzanine Fund I LP, which The bottom line is that senior
Accordingly, sponsors are over-equi- would finance deals sponsored by En- lenders need to start lending again
tizing their deals. "Private equity firms deavour and other firms. KRG Capital before mezz players can make any
are willing to put more equity in trans- Partners, meanwhile, is in the market kind of headway.
actions," Steuerman with a $200 mil- "Regular people can't even get
said, noting that lion mezz fund, mortgages; how is a leveraged buyout
the "return profiles which would be supposed to be completed?" one lend-
[between equity 'The senior lenders used to finance er asked. "We need the entire lending
and mezzanine] are aren't being very its own deals. market to start running well again,
converging. There Other firms such but who knows exactly when that
is also the benefit of aggressive at all; as The Audax will happen."
[reducing risk] with Group, Summit While tew will guess as to when
less debt."
we will be here to Partners and TA the credit markets will loosen up,
To some lenders, fill the gap. " Associates have commercial banks weren't created for
the current envi- always raised long term CDs. Eventually, when the
ronment bears a re- mezz funds, al- remaining banks regain their appetite
semblance to other though some, for risk, the mezzanine market will be
periods in the market's history. "This such as Audax, won't invest alongside positioned to benefit.
is the same thing we experienced in their equity vehicles. "There's a lot of private equity
1999 through 2001, when firms want- While the mezz market remains money on the sidelines. Senior lend-
ed to patch a deal together to avoid the stagnant going into 2009, it has shown ing will come back, purchase price
cost of mezz," said Michael Hermsen, signs of life at times during the credit multiples will come down, and mezz
a managing director with Babson crisis. In the early part of last year, for will do better," Steuerman said.
Capital Management. instance, when the second-lien market For now, however, it's a renaissance
Hermsen, however, does not con- crumbled and BDCs began showing delayed. —Danielle Fugazy, M&A

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