By Kate Haywood Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- NewStar Financial Inc. (NEWS) plans to sell more collateralized loan obligations if market conditions permit after its successful completion of the largest CLO sold by a U.S. fund in about a year, Chief Executive Tim Conway and the firm's head of asset management and treasury, John Frishkopf, said Friday. In a telephone interview with Dow Jones Newswires, Frishkopf said the specialized commercial finance company wants to get back to business as usual in terms of CLO issuance. "Until the credit crisis started, we issued a new CLO each year as part of our business plan...we would be looking to get back to this level of issuance," he said. Collateralized loan obligations are structured-finance products similar to those that fueled a leveraged-buyout boom earlier this decade. They pool high-risk loans sold by junk-rated companies and cut them into various tranches of risk and return. This once-common investment vehicle virtually disappeared during the credit crisis, as investors opted for more straightforward investments. Guggenheim Partners LLC bought most of the new $275 million collateralized loan obligation managed by NewStar Financial in a deal that settled Thursday. It is the largest CLO sold by a fund in the U.S. since COA CLO Financing Ltd. issued a $322 million CLO in January 2009, according to Dealogic. The deal, which was backed by middle-market loans--deals that are smaller than $100 million or deals offered by companies with sales of less than $500 million--included a roughly $150 million AAA-rated tranche, the highest level of investment grade, which priced at par to yield 375 basis points over the London interbank offered rate, or Libor. There was also a $40 million AA-rated tranche, which priced at a discount in the low 90 cents to yield 750 basis over Libor. A roughly $30 million BB-rated slug and the unrated remaining tranche of the CLO weren't offered to Guggenheim and retained by NewStar. The sale of NewStar's CLO, which was arranged by Wells Fargo & Co. (WFC), followed news in early December that Silvermine Capital Management LLC, a hedge fund in Stamford, Conn., hired Citigroup Inc. (C) to underwrite and distribute a new $250 million CLO, while in Europe, J.P. Morgan Chase & Co. (JPM) priced at the end of last year a new multimillion-euro CLO backed by loans made by Spain's Caixa de Catalunya. A revival of CLOs would be good news for speculative-grade-rated corporate borrowers that rely on the high-risk, high-yield leveraged-loan market to raise funds. These include car makers, airlines, retailers, utilities, restaurant chains and media companies, as well as leveraged-buyout firms. CLOs bought nearly two-thirds of the debt that financed leveraged buyouts in the first half of 2007. That had shrunk to about 20% by the middle of last year as issuance of new CLOs fizzled out as the credit crunch made it difficult for investors to borrow money to create these vehicles. Although optimistic about the potential to do more CLOs in the future, Conway is realistic that a market comback could take some time. "We expect that there will be an opportunity to do more CLO issuance, but it will be a gradual reopening of the market," he said. Even so, Conway said analysts forecasts, such as J.P. Morgan Chase's estimates that around $5 billion of new CLOs would be issued in all of this year, could turn out to be low if interest from other investors in their CLO is anything to go by. "This will be the first in a number of transactions that will get done this year. Given the appetite for yield and the interest we got from other investors when marketing the recent CLO, we wouldn't be surprised to see issuance this year higher than what some of the banks are predicting." At the peak of the leveraged-buyout boom earlier this decade, more than $274 billion of CLOs were sold in a two-year period, according to Dealogic. That compares with 2008's total of $39.5 billion. -By Kate Haywood, Dow Jones Newswires; 212-416-2218; kate.haywood@dowjones.com
