Creating another mouth for the leveraged loan market to feed, Boston- based CypressTree Investment Management Co. has brought a new $575 million collateralized loan and bond obligation to market.
The firm closed its CypressTree Investment Partners I Ltd. fund Aug. 16, making it the latest institutional investor to join the crowdclamoring for high-yield assets.
Competition for pieces of leveraged or high-yield loans is intense as bank loan investors seek better returns than are available on safer, investment-grade loans.
In the first half, funds such as CypressTree purchased nearly 20% of the highly leveraged loans brought to market, according to Portfolio Management Data LLC. These are loans with spreads of 225 basis points or more above the London interbank offered rate.
Asset-backed funds such as CypressTree securitize and manage pools of loans and high-yield bonds that are meticulously structured and managed to meet rating agency requirements. The securitizations then typically receive higher ratings than those of the underlying assets.
Structured by Chase Securities Inc., the fund now has about one-third of the underlying assets it eventually will hold and should acquire the rest over the next six months, said Tracy Pridgen, the Fitch Investor Service analyst who rated CypressTree.
The CypressTree fund includes $230 million class A senior secured floating-rate notes rated AAA by Fitch, $100 million class B-1 senior secured floating-rate term notes, and $115.6 million class B-2 senior secured floating-rate revolving notes rated AA. The $57.5 million subordinated secured floating-rate notes are rated BBB-minus. A $71.9 million equity tranch was not rated.
The notes are secured by a pool of fixed- and floating-rate assets, including senior bank loans, high-yield bonds, and emerging market debt, according to Fitch.
The fund is managed by Jeffrey S. Garner, who joined CypressTree last August. A managing director and chief investment officer of CypressTree, Mr. Garner previously founded and managed the Eaton Vance Group of prime- rate funds, with assets in excess of $2.5 billion. Begun in 1989, Eaton Vance was one of the first funds to invest in the bank loan market.
About 70% of the total assets in the CypressTree fund will be senior bank debt, with 20% of assets in high-yield bonds and 10% in emerging markets debt, Mr. Garner said.
Though Mr. Garner's expertise in managing senior debt is well established, Mr. Pridgen said, CypressTree took an unusual step and brought in outside expertise to help manage the remaining 30% of the assets.
Boston-based Fidelity Management Trust Co., a unit of FMR Corp., and Grantham, Mayo, Van Otterloo & Co., an asset management firm specializing in emerging markets debt, also based in Boston, were contracted as subadvisers to CypressTree on management of the high-yield bond and emerging market debt assets, respectively.
"They didn't compromise on skill sets," said Mr. Pridgen. "Rather than having a person who says, 'I did well on bank loans, let me try my hand at high-yield bonds,' they went out and got Fidelity."
Nonbank or institutional investors, such as prime-rate funds and insurance companies, are increasingly important buyers of high-yield debt and portions of higher-yielding leveraged loans.
The growth in the number of these players from fewer than 15 in 1993 to about 55 today is one of the reasons behind the tremendous liquidity now available in the syndicated loan market, said observers.
These investors also have helped spark the development of hybrid financing structures that combine elements of bank loans and bonds.
Loan syndicators regularly use such bond-like features as 10-year or longer terms, prepayment penalties, and nonamortizing bullet maturities to cater to these institutional investors' needs.