Bloomberg has a lot more information on the $2.8bn “Freedom” CLO Lehman brothers closed last week. FT Alphaville reported news of the deal at the time. The question we asked then, was, would Lehman shift the equity tranche or would they (likely) end up keeping it.
The price of Freedom, for Lehman? $565m.
Freedom CLO contains 66 loans, including debt the fourth- largest U.S. securities firm underwrote for buyouts, according to the indenture filed last week. New York-based Lehman will hold a piece of the $565 million subordinated note, the riskiest portion, according to the term sheet. The bank sold $2.2 billion of bonds with investment-grade ratings.
Still, that’s a small price to pay for such an attractive clearout of Lehman’s leveraged loan warehouses. (The bank had a total of $10.9bn in “contingent” loan commitments at the end of the first quarter this year)
According to the prospectus, a slice of Freedom gets you exposure to:
First Data (KKR)
TXU Corp (KKR & TPG)
Sequa Corp (Carlyle)
and bank credit lines to… Imperial Tobacco and… Countrywide Financial.
All of these loans are trading low in the secondary market, which is perhaps reflected in the coupons Freedom is paying. The $2.2bn senior notes will pay a 225bp spread, while Lehman’s equity notes will collect the - potentially - fat remainder.
Standard & Poor’s published an interesting research report on Tuesday, in which they noted a big discrepancy between pricing in Europe’s primary loan market and the secondary market. On the one hand Europe’s CLO investors, for example, see true credit risk and a high-spread environment. On the other hand, as S&P notes, “there has been only a limited change in primary pricing”.
The key factor in getting the LBO pipeline moving again, said S&P, would be reconciling the two. Primary market loans terms need to meet secondary market spreads. And on existing debt, banks need to offer more.
It will be interesting to see whether the coupons offered by Freedom are judged to give value for money. With Countrywide, for example, at 79 cents on the dollar, and S&P warning of more corporate defaults ahead, CLO investors need nerve.
