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The Middle Market CLO Desktop Primer

David Preston, CFA


CDO and Commercial ABS Research
(704) 410-3080
david.preston@wellsfargo.com

Jason McNeilis, CFA


CDO and Commercial ABS Research

(704) 410-3077
jason.w.mcneilis@wellsfargo.com

July 24, 2014

Please see the disclosure appendix of this publication for


certification and disclosure information

Contents
CLO Overview
What is a C LO?
C LO Structure & Life C ycle
Balance Sheet vs. Arbitrage C LOs
Middle Market Lending: The Market
Middle Market Definitions
Market Size / Segments
Sponsored, Institutional Middle Market Loan Size
Middle Market Lending: The Loans
Spreads
Leverage
Default Data
Recovery Data
C ovenant Lite Loans in the Middle Market Space
Middle Market Lending: The Lenders
Investors Base
Lender Types
Middle Market Lenders: Banks
Middle Market Lenders: BDC s
Middle Market CLOs
Volume and Outstanding Balance
Spreads
Structure
C ollateral
Performance: Rating & Default History
Middle Market CLO Managers
Middle Market C LO Manager Overview
Servicer Risk
Top 10 Managers by Deal C ount
Manager C LO Summaries

4
6
14
17
19
25
27
29
31
35
37
40
43
45
46
53
58
61
64
68
72
76
80
82

CLO Overview

What is a CLO?

Securitization backed by a pool of corporate loans


Assets typically floating rate, first lien, senior secured, rated below IG
Profit from a funding gap
Funding gap = net asset yield liability yield - fees
Leveraged to enhance returns
Asset yield is used to pay down creditors in order of seniority
Equity gets residual
More seniority = lower yield/lower risk
Similar to a synthetic bank with a defined life and stricter covenants
Current U.S. market size is approximately $325 billion

For a complete introduction to CLOs, we recommend our CLO Primer.


4

What Is a CLO: Cash Flow CLO

Cash flow CLOs differ from other ABS, as they have an actively managed
portfolio.

Cash flow CLOs also feature reinvestment periods.


During the reinvestment period, the manager may buy and sell assets,
subject to asset quality covenants.

In balance sheet CLOs, the loan originator may replace assets during the
reinvestment period.

The reinvestment period is an IO period for the CLO.


Interest proceeds from the portfolio assets pay CLO note interest.
During reinvestment, principal proceeds (repayments or amortization)
from the portfolio assets are available for the CLO manager to reinvest
by purchasing new collateral assets.

What Is a CLO: Basic Structure


$

$
$

Class A Notes
[Aaa/AAA]

Asset Portfolio

P&I
proceeds
on an
ongoing
basis

CLO Issuer
(Offshore
Special
Purpose
Vehicle)

$
Class B Notes
[Aa2/AA]
$

Class C Notes
[A2/A]

Collateral
Purchase

$
Class D Notes
[Baa2/BBB]

Collateral
Manager

Source: Wells Fargo Securities, LLC

$
Equity
(NR)
Residual Cash Flow
First Loss
6

Wt
Avg.
Cost of
Funding

What Is a CLO: Structure

Interest Proceeds
Proceeds
Interest
Taxes,Fees,
Fees, Hedge
Hedge Payments
Taxes,
Payments
Class
A Current
Interest
Class
A Interest
ClassAA Coverage
Coverage Test
Class
Test
FAIL
FAIL

PASS
PASS

class B
B Interest
Class
Interest

When
Cured

class A
A Principal
Class
Principal

class B
Test
Class
BCoverage
Coverage
Test
FAIL
FAIL

PASS
PASS

Class A Principal
Subordinated Mgmt Fees

When
Cured

EQUITY

Class B Principal
Source: Wells Fargo Securities, LLC

What Is a CLO: Structure

Coverage tests act to protect senior note holders.


Par-based asset/liability tests: overcollateralization (OC).
Yield-based tests: interest coverage (IC).
If a test is failing, cash flows are diverted to senior notes until the test is in
compliance.
Test cures by paying down senior notes (reducing the par amount).
This deleverages the deal and cuts off cash flows to all classes below the
failed test.
Many OC tests contain par haircuts for problematic assets
For example: Excess CCC loans are haircut to their market value in
CLOs
For example: PIKing assets may be counted as defaults

What Is a CLO: CLO Life Cycle

$ Collateral Balance

Warehouse
Period:
Warehouse
120Bank provides
CLO Manager
financing to
acquire
assets.
100

Ramp-Up Period:
Proceeds from
CLO Issuance
used to purchase
additional assets.

Reinvestment Period: Collateral Manager permitted to


actively trade underlying assets. Principal cash flows
from underlying assets can be used by Collateral Manager
to purchase new assets.

Amortization Period:
Cash flows from assets are
used to pay down the
outstanding notes.

80

60

40

20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41
Amortization
CLO Closing
Ramp-Up
Period
Date
End Date
Source: Wells Fargo Securities, LLC

What is a CLO: CLO Life Cycle

Ramping Up
The bank may provide a warehouse facility as financing for the CLO

manager prior to note issuance.


Closing
CLO issues notes and pays the warehouse provider as applicable.
CLOs are typically issued with an asset balance slightly less than the
principal balance of the liabilities and equity tranche. Essentially,
equity pays the deal fees.
Reinvestment
After the end of the ramp-up, the CLO manager monitors and trades
the portfolio to ensure the portfolio remains in compliance with
collateral-quality tests and reinvests principal proceeds back into the
portfolio.

10

What Is a CLO: CLO Life Cycle

Amortization Period
The manager does not replace prepaying assets; instead, the cash is

used to retire the notes sequentially.


Optional Redemptions
Types of calls to limit the life of a deal:
Optional Redemption - The equity holders have the opportunity to
redeem the notes following a two-thirds or majority vote.
Cleanup Call - The call sells assets should the pool par value fall
below a prescribed level.
Equity holders may wish to call the deal if the gap between the asset yield
and the total CLO debt cost shrinks this leads to decreased equity
distributions.
The equity holders can call the CLO sell the assets, pay off the notes
and keep the proceeds.
CLO 2.0 deals often allow tranche refinancing or re-pricing, which can
be less onerous than calling the CLO.
11

What Is a CLO: Reinvestment

During reinvestment, the CLO manager is limited in trading by a series of


portfolio quality covenants, dictating asset portfolio characteristics.
Typically, if a CLO is failing a quality test, the manager may not trade
except to improve the failing test, but no cash flows are diverted.
Common CLO Portfolio Tests
Wt. Avg. Spread Test
Wt. Average Life Test
Max. Rating Factor Test
Diversity Test
Min. Wt. Avg. Recovery Rate Test
Min. WAC Test
Source: Wells Fargo Securities, LLC
Moody's
Rating

Rating
Factor

Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3

1
10
20
40
70
120
180
260
360
610

Moody's
Rating

Rating
Factor

Ba1
940
Ba2
1,350
Ba3
1,766
B1
2,220
B2
2,720
B3
3,490
Caa1
4,770
Caa2
6,500
Caa3
8,070
Ca
10,000
C
10,000
Source: Moody's, Wells Fargo Securities, LLC

12

What Is a CLO: Reinvestment


Common CLO Portfolio Covenants
% Second Lien
% High Yield Bond
% Rated CCC+ or below
% Fixed Rate Securities
% Non US Issuer / Non USD
% Specific Countries
% Single Issuer / Obligor
% Top 3 Issuers
% PIK able Securities
% Delayed Funding Term Loans
% Synthetic Securities
% Current Pay Obligations
% CDO
% Zero Coupon Securities
% Current Pay Obligations
% Pay Freq. Less Than Qtrly
% Participations
% Debtor in Possession Loans
% Same Industry Category
% Revolving Credit Facilities
Source: Wells Fargo Securities, LLC

13

What Is a CLO: Two Types of CLOs

CLOs: assets are typically floating rate, senior secured, first-lien


leveraged loans.
May allow small allocations (buckets) for high-yield bonds,
second-lien loans and revolvers.
Two types of CLOs:
Typical Issuer
Purpose
Collateral Origination

Arbitrage CLO
Asset manager
Management fees
Funding gap
Issuer not involved

Balance Sheet CLO


Specialty finance company
Better financing
Term financing
Issuer involved

Asset manager purchases in


primary / secondary market
Primary Collateral Type Broadly syndicated loans

Issuer originates
Middle market loans

Collateral Management

Actively managed

Actively managed

Manager reinvests principal


proceeds during reinv. period

Manager reinvests principal proceeds


during reinv. period

Manager can trade the portfolio,


subject to portfolio tests

Manager can trade the portfolio,


subject to portfolio tests
Actual trading may be limited due to
the nature of middle market loans

Source: Wells Fargo Securities, LLC

14

What Is a CLO: Two Types of CLOs

Arbitrage CLOs are issued by asset managers as an efficient way to


raise AUM.

Assets (loans) are purchased in the primary and secondary markets.


Balance sheet CLOs are issued as financing vehicles.
Securitization technology often provides a more desirable (cheaper,
longer, better terms) source of term financing than alternatives.

The balance sheet CLO issuer typically originates the assets.


Balance sheet CLOs are similar in purpose and concept to most
consumer ABS sectors.

15

Middle Market Lending: The Market

Middle Market Loans: Definition


What is a Middle Market Loan?
Generally speaking, a loan to a small- or medium-sized firm.
Unfortunately, there is no uniform, standard definition of middle market. However, we
present the most common definitions.

1. Loan size: Typically, facility size < $150 million denotes a loan as a middle market
loan.

2. Issuer size: EBITDA < $50 million is often the cut-off for a middle market loan.
LCD uses this definition.

3. Combination: Thomson Reuters LPCs definition:


Borrower sales <$500 million, deal size < $500 million

17

Middle Market Loans: Definition


What is a Middle Market Loan?
There are other ways to think about the difference between middle market loans and
broadly syndicated loans.

1. Lending Group: Middle market loans are often the product of single lenders, or
small lending clubs.

2. Secondary trading/pricing: Some CLO investors define middle market loans are
those without regular trading activity or price data.

3. Direct origination vs. buy-side:. Many middle loan originators are directly

involved in origination, while BSL loans are purchased in primary or secondary


markets.

18

Middle Market Loans: Definition


Middle Market Loan Market Segments: Middle market lending is often broken down
into different segments, often by borrower or facility size.

1. General Borrower Size Market Segmentation:


Segment

Borrower EBITDA

Small Middle Market

$7.5 million to $25 million

Traditional Middle Market

$15 million to $35 million

Large Middle Market

$30 million to $75 million

2. Thomson Reuters LPC Definition:


Traditional Middle Market

Deal Size <$100 million

Large Middle Market

$100 million < Deal Size < $500 mmm

3. LCD Definition:
Traditional Middle Market

Deal Size <$200 million

Larger Middle Market

$200 million < Deal Size < $350 mmm


19

Middle Market Loans: The Market

Middle market new issue total volume is typically $180 billion per year; 2013 saw an

increase of approximately 13%.


Since the financial crisis, approximately 60% of new issue volume has been refinancing.
$250

$200

Total issuance includes Revolvers, 1st Liens, 2nd Liens, Delayed Draws, etc

Middle market:
Borrower sales of $500 million or less
Deal size $500 million or less
$183.1

$175

$180.1

$203.6

80%

$183.2

$182.2

$180.3

70%

$167.8
$150.0

$150
$B

90%

60%

$125

50%
$107.0

$101.5

$98.1

$100

$71.2

$75

40%

30%

$50

20%

$25

10%

Source: Thomson Reuters LPC

Refi.

New money

% New Money

20

1H14

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

0%

2003

$0

% New Money

$225

100%

Middle Market Loan Total Issuance

Middle Market Loans: The Market

Much of the middle-market lending is done by regional banks to


middle-market companies, which use revolvers for working capital or
capex.

LPC splits the middle market lending universe between sponsored and
non-sponsored.

Non-sponsored lending is larger but less relevant for CLO investors.


As LPC describes it, the non-sponsored deals can be thought of as
relationship lending by regional banks.

In contrast, sponsored lending is typically done by a mix of lenders,


including specialty finance companies.

Sponsored issuance accounts for approximately 40% of middle market


loan issuance.

21

Middle Market Loans: The Market

LPC splits the middle market lending universe between sponsored and non-sponsored.
Non-sponsored lending is larger but less relevant for CLO investors.
$250

$225

100%

Middle Market Loan Issuance


Middle market:
Borrower sales of $500 million or less
Deal size $500 million or less

90%
$203.6

$200

80%

$183.2
$183.1

70%

$167.8

$150.0

$150
$B

$180.3

60%

$125

50%
$107.0
$101.5

$100

$98.1

$71.2

$75

40%

30%

$50

20%

$25

10%

Source: Thomson Reuters LPC

Non sponsored

Sp.

22

Sponsored Share (Rt Axis)

1H14

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

0%
2003

$0

Sponsored SHare of New Issue

$175

$182.2

$180.1

Middle Market Loans: The Market

CLO investors also traditionally focus on the institutional loan tranches.


LPC and LCD define pro rata loans as Term Loan A tranches and revolvers and
institutional loans as the Term Loan B tranche.

According to LCD, the Term Loan A typically has a progressive amortizing schedule and
is typically syndicated to banks, along with a revolving credit.

However, Term Loan As are now less common, as institutional tranches make up more
of funded loan issuance. Therefore, most of the pro rata issuance consists of revolvers.

Institutional loan issuance covers the Term Loan B, which are facilities for nonbank
investors.

It should be pointed out that banks purchase institutional tranches at times.

23

Middle Market Loans: The Market

CLO investors traditionally focus on the institutional loan tranches.


$75

MM Institutional Loan Issaunce


Traditional MM Deal size <=$100M
Large MM - Deal size >$100M to $500M

100%

$71.9
$68.8

90%

For all: Borrower sales <$500M

$60

80%

$58.0
$55.5

70%
$44.9

Instituional MM Loan Issuance $ B

$45

60%

$33.9

$30

50%

$34.2

40%

$26.3
$22.3

$21.2

$15

20%

$10.8

$10.5
$7.2

30%

$6.5

10%

Large MM Inst.

Trad MM Inst.

Inst. Issuance as % of Total (Rt Axis)

Source: Thomson Reuters LPC

24

1H14

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

0%
2001

$0

Middle Market Loans: The Market

Middle market CLO investors typically focus on sponsored, institutional loans.


Sponsored institutional volume was approximately $40 billion per year in 2005-2007,
and 2013. Volume was approximately $30 billion per year in 2011-2012.
$90

$80

100%

Middle Market Sponsored Institutional Loan Issuance

90%

Middle market:
Borrower sales of $500 million or less
Deal size $500 million or less

80%
72.5

71.0

$70

69.6

67.6

70%

64.2

64.6

$B

$60

60%
52.7

51.7

$50
43.1

44.3

50%

45.8

$40

40%

37.9
34.0
30.3

$30

27.8

27.1
22.6

28.4

30%

22.5

$20

18.2
12.2

$10
3.4

20%

13.1

12.4 12.4

10%

7.9

5.2

4.0

Source: Thomson Reuters LPC

Sp. Inst.

Total Sponsored

Inst. % of Total Sponsored (Rt Axis)

25

1H14

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

0%
2001

$0

Inst. Share of Sponsored Issuance

$100

Middle Market Lending: The Loans

900

1Q10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14

Middle Market Loan Primary Spread (ex OID)

Middle Market Loans: Spreads


Traditional MM: Deal Size <= $100 m; Large MM Deal size > 100M to $500m; for all Borrower sales < $500m

50

Source: LPC Thomson Reuters


Floor
Spread

27

900

850
850

800
800

750
750

700
700

650
650

600
600

550
550

500
500

450
450

400
400

350
350

300
300

250
250

200
200

150
150

100
100

50

Middle Market Loans: Spreads


Spread (does not include Floors or LIBOR)

700
650

Traditional MM: Deal Size <= $100 m;


Large MM Deal size > 100M to $500m; for all Borrower sales <
$500m

650
600

550

550

500

500

450

450

400

400

350

350

300

300

250

250

200

200

150

150

100

100

Source: LPC Thomson Reuters

Spread

28

2Q14

4Q13

1Q14

3Q13

2Q13

1Q13

3Q12

4Q12

2Q12

1Q12

3Q11

4Q11

2Q11

1Q11

4Q10

2Q10

3Q10

1Q10

4Q09

2008

1Q-3Q09

4Q07

3Q07

2Q07

1Q07

3Q06

4Q06

2Q06

1Q06

4Q05

2Q05

3Q05

1Q05

4Q04

3Q04

1Q04

2Q04

4Q03

3Q03

2Q03

4Q02

1Q03

3Q02

50

2Q02

50

1Q02

Middle Market Loan Primary Spread - BPs (ex OID)

600

700

Middle Market Loans: Leverage

MM LBO Debt / EBITDA

First-lien leverage on institutional MM LBOs has averaged 3.9x since 2011.


Total leverage on institutional MM LBOs peaked at 5.7x.
6.0

6.0

5.5

5.5

5.0

5.0

4.5

4.5

4.0

4.0

3.5

3.5

3.0

3.0

2.5

2.5
4.5

4.4

2.0
1.5
1.0

3.93.84.0
3.7
3.6
3.53.5
3.4
3.4
3.0
2.7 2.8

4.1 3.94.04.1 4.0 4.1


4.0
3.8 3.8
3.6
3.5 3.7
3.4 3.53.3
3.1
3.0
2.8

3.83.8

2.92.92.92.9

3.2

3.2
2.8

2.3

2.2

Source: LPC

1.5
1.0

0.5

0.5
-

1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14

0.0

2.0

1st Lien Debt to EBITDA

Junior Debt to EBITDA

29

Middle Market Loans: Leverage

Total leverage on institutional MM LBOs have been lower than BSL LBO total leverage.
MM LBO leverage is typically 1.0x 1.5x lower than BSL LBO leverage.
8.0

8.0

7.5
7.0
6.5

5.5

5.5

5.7
5.3

6.3

6.2
5.5

5.5

5.3

5.9

5.6

4.8

4.6

4.5

4.5

5.1

5.3

5.5
5.0

4.6
4.3

4.0

6.5
6.0

5.6
5.1

5.0

5.0

4.5

3.8

4.0

1.0

0.5

0.5

0.0

Source: LPC

MM (Inst. LBO)

BSL LBO

30

1H14

1.0

2013

1.5

2012

1.5

2011

2.0

2010

2.0

2009

2.5

2008

2.5

2007

3.0

2006

3.0

2005

3.5

2004

3.5

2003

Total LBO Debt / EBITDA

7.0

6.3

6.0

4.0

7.5

7.1

Middle Market Loans: Default and Recovery

There is limited market-wide default data for middle market loans, for several reasons.
The lack of a standardized definition of a middle market loan is part of the problem.

Middle market lending groups are typically smaller than those in the broadly syndicated
space.

Smaller lending groups can lead to lower default rates, if lenders are more involved with
the borrower.

Middle market lenders are typically less able to sell the loan if the issuers credit profile

decreases; therefore, they may be more likely to step in and work on a cure before a
default.

On the other hand, looser structures in broadly syndicated loans can lead to lower
default rates for broadly syndicated loans.

Middle market CLO managers tend to specialize in sectors or types of loans. Therefore,
we believe that individual manager performance statistics are more significant than
market-wide data.

31

Middle Market Loans: Default and Recovery

We present middle market loan default data, with the understanding that the data may
not represent the entire middle market loan universe.
In addition, structural differences, such as covenant-lite broadly syndicated loans, may
have led to lower default rates for broadly syndicated loans in 2009-2012.
15.0%

15.0%

12.5%

12.5%
MM Avg: 2.4%

10.0%

Source: LCD

MM (#)

Lg Corp (#)

32

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

0.0%
Jan-08

0.0%
Jan-07

2.5%

Jan-06

2.5%

Jan-05

5.0%

Jan-04

5.0%

Jan-03

7.5%

Jan-02

7.5%

Jan-01

12m Default Rate (%)

Lg Corp Avg: 3.2%


10.0%

Middle Market Loans: Default History During 2009

Moodys compared the default rates on CLO collateral loans during the credit

crisis, broken down by BSL CLOs versus small and medium enterprise CLOs
(SME CLOs) for the period of December 2008 to December 2009.

Both CLO collateral pool default rates rise as WARF increases, which indicates

that the lower asset ratings (and higher WARF) are related to higher default
risk.

For most of the WARF stratifications, the SME CLO collateral posts lower
default rates.

Moodys believes, and we agree, that the lower default rates may be related to
the substitution provision in many SME/MM CLOs.

On the other hand, BSL loans may have avoided default due to covenant-lite
provisions, waivers, or other structural benefits.

33

Middle Market Loans: Default History During 2009

During 2009, SME CLO assets had lower default rates than assets in BSL CLOs, when
comparing CLOs with similar WARFs, for most WARF stratifications.

Over the next 12 months, BSL CLOs with WARFs below 2,800 had
an asset default rate of 8.4%

18%

12m Default Rate (CLO Collateral Assets)

100%

76% of BSL CLOs had WARFs below 2,800, as of Dec. 2008

90%

16%

80%

14%

70%

12%

60%

10%

Over the next 12 months, SME CLOs with WARFs below 2,800 had
an asset default rate of 7.6%.

8%

18% of SME CLOs had WARFs below 2,800, as of Dec. 2008

50%

40%

6%

30%

4%

20%

2%

10%

0%

0%
<2800
% of BSL CLOs

2800-3200
% of SME CLOs

3200-3800
CLO WARF
BSL CLO 12-Month Default %

Source: Moody's

34

>3800
SME CLO 12-Month Default %

% of CLO Universe with Applicable WARF

20%

Middle Market Loans: Default and Recovery

There is a lack of time series recovery data for middle market loans.
We can reference two studies on middle market loan recoveries.
Churchill Financial and S&P CreditPro produced recovery rates for loans,
based on loan size, for the time period 1990-2010.

The study showed that smaller loans (<$200 million in size) had higher
nominal and discounted recovery rates, when compared to larger loans.

Nominal Rec.
Discounted Rec.

Recovery Rates, 1990-2010


Smaller Loans
Larger Loans
Loans < $200 mm
Loans > $200 mm
86.12%
81.04%
75.42%
70.06%

Nominal Rec.: Value at emergence as a pct of principal at time of default


Discounted Rec.: Nominal recovery, discounted back to period in which interest was last paid

Source: Churchill Financial, S&P CreditPro

35

Middle Market Loans: Default and Recovery

There is a lack of time series recovery data for middle market loans.
We can reference two studies on middle market loan recoveries.
In 2014, LCD and S&P CreditPro updated the data with recovery figures for
2010-2013.

The data again showed the smaller loans had better recovery values than
larger loans.

Recovery Rates, 2010-2013


Smaller Loans
Larger Loans
Loans < $200 mm
Loans > $200 mm
Recovery Rate
81%
74%
Source: LCD, S&P CreditPro

36

Middle Market Loans: Covenant-Lite Loans

Middle market loans are much less likely to be covenant-lite.


Lenders are less able to sell loans, which may lead to a stronger focus on loan structure.
LCD reports that only five of 57 new traditional middle market deals (defined here by
LCD as deal size less than $200 million ) in H1 2014 was covenant-lite.

By volume, 21% of traditional middle-market volume in H1 2014 was covenant-lite.


While the smaller end of the middle market may be more resistant to more issuerfriendly structures, the large middle market sector is often more likely to mimic the
broadly syndicated market.

LCD also reported that, by volume, 41% of larger middle market deals (deals with a deal
size of $201 million-$350 million ) in H1 2014 were covenant-lite.

This is an increase from 2013s covenant-lite market share of 27%.


For comparison, approximately 60% of broadly syndicated loans issued in 2013 and
2014 were covenant-lite.

37

Middle Market Loans: Covenant Lite Loans


Middle market loans are much less likely to be covenant-lite.
In 2013, only 24% of middle market loans issued were covenant-lite.
Traditional middle market loans were less likely to be covenant-lite.
For comparison, in 2013, 57% of broadly syndicated loan issuance was covenant-lite.
100%

100%

Middle Market Cov-Lite Issuance

90%

90%
In 2013, only 13% of traditional middle market
loans issued were covenant-lite; in 2013, 57% of
broadly syndicated loan issuance was covenantlite.

80%

% of Inst. Issaucne that is C ov-Lite

80%

70%

70%

60%

60%

50%

50%

Traditional Middle market: $200 million or less


Large Middle Market: $201-$350 million

40%

40%

30%

30%

20%

20%

10%

10%

Trad. MM Cov-Lite % of Inst. Issuance

Lg. MM Cov-Lite % of Inst. Issuance

Source: LCD

BSL Cov-Lite % of Inst. Issuance

2014 data as of Q2 2014

38

2014

2013

2012

2011

2010

2009

2008

2007

0%

2006

0%

2005

Middle Market Lending: The Lenders

Middle Market Loans: Investor Base

LCD data show that institutional investors were the largest buyers of primary middle
market loans from 2004 to 2007.

In our opinion, as overall credit spreads tightened, institutional investors looked to the
middle market sector to add yield; the appetite of institutional investors dwarfed the
middle market world, leading to the large share of purchases.

We believe that the higher end of the middle market is a logical place for excess capital
from the broadly syndicated world.

However, in 2008 and 2009, finance companies were the largest primary investors in
middle market loans.

We believe that as the credit crisis deepened, institutional investors exited the middle
market sector for the more well-known pastures of broadly syndicated loans.

Meanwhile, those firms that specialize in middle market lending continue to lend, albeit
at wider spreads and lower multiples.

40

Middle Market Loans: Investor Base

In 2010 and 2011, as credit assets recovered, institutional investors returned to middle
market lending.

As spreads tightened, and loans prepaid, institutional investors were faced with falling
spreads and declining asset balances, leading to increased middle market loan interest.

LCD data show that since 2003 institutional investors have consistently made up at least
two-thirds of the total loan market.

In the middle market sector, institutional investors buy during good times, but may exit
during times of stress.

This provides opportunities for the middle market specialists during downturns.
Of course, as in any lending business, this may cause problems during extended periods
of credit strength, as newer investors may push spreads tighter and standards looser.

Middle market investors may take comfort from middle market specialists lower market
shares during times of deteriorating lending standards.

41

Middle Market Loans: Investor Base


Primary Market for Middle Market Leveraged Loans
100%
4%
13%

90%

Primary Market for MM Leveraged Loans

80%

3%

26%

22%

20%

26%

18%

29%

25%
Inst. Inv.

16%

70%
8%

9%

30%

49%

46%

12%
67%

60%

57%

58%
65%

68%

67%

74%

40%

50%

39%

35%

Fin. Co.

40%

21%

23%
21%

30%

17%
14%

11%

13%

13%

20%

14%

Banks

10%

0%
Source: LCD

62%

64%

65%

68%

76%

69%

35%

19%

20%

21%

14%

30%

32%

29%

28%

23%

17%

12%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

1H 14

Bank (Dom & For.)

Finance Co.

42

Institutional Investors

Securities Firm

Middle Market Loans: The Lenders


Sources of Capital in the Middle Market
Middle market companies have several sources of capital available.

Traditional Banks

Finance
Companies

CLOs

BDCs

Hedge Funds

Mezzanine
Funds

Pvt. Equity
Funds

Senior
Revolver

Senior Term
Loans

Unitranche
Loans*

Second
Lien

Subordinated
Debt

Preferred
Stock

Common
Stock

Security

Secured by 1st
lien. Top of the
capital stack

Secured by 1st
lien behind the
bank revolver

Secured by 1st
lien behind the
bank revolver

Unsecured

Unsecured

Coupon
Leverage

L+150-300
0-0.5x

L+300-700
0.5-3.5x

10-12%
0.5-4.0x

Secured/Unsecured;
Secured by 2nd
however, If secured
lien behind the
it is behind all senior
bank/senior debt.
(incl. 2nd lien)
12-14%
3.5x-5.0x

13-15%
4.0-6.0x

*This is a combination of senior/subordinated into one loan with a blended interest rate. It is often
referred to as a "one stop" debt solution
**The highlighted items are the asset classes that generally comprise BDC portfolios
***Leverage is denominated by leverage turns to TTM EBITDA
Source: Wells Fargo Equity Research, The BDC Almanac, Jan. 2014

43

Middle Market Loans: The Lenders


Middle Market Lenders:

Banks
JP Morgan, BAML, Wells Fargo, PNC

Specialty Finance Companies


GE Capital, Madison Capital, NXT

BDCs
ARCC, GBDC, PSEC
Source: Wells Fargo Equity Research, The BDC Investors Almanac, Jan. 2014.

44

Middle Market Loans: The Lenders

Thomson Reuters LPC data show the most active bookrunners in the Large Middle
Market and Traditional Middle Market Sectors.
2013 Middle Market Bookrunner League Tables
Large Middle Market

Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Institution
Bank of America Merrill Lynch
Wells Fargo & Company
JP Morgan
GE Capital
PNC Bank
BMO Capital Markets
Credit Suisse
Jefferies Finance LLC
U.S. Bancorp
RBC Capital Markets
BNP Paribas SA
SunTrust Bank
Deutsche Bank
Barclays
Citi
RBS
KeyBank
Mitsubishi UFJ Financial Group
Fifth Third Bank
Morgan Stanley

Vol. ($
# Deals mm)
169
20,115
177
19,392
141
17,761
115
12,016
61
6,335
69
6,333
42
5,848
35
5,004
44
4,764
34
4,542
31
4,399
52
4,376
35
4,350
27
4,303
31
3,788
34
3,250
35
3,154
25
3,008
30
2,858
21
2,365

2013 Middle Market Bookrunner League Tables


Traditional Middle Market
Mkt
Share
(%)
13%
12%
11%
7%
4%
4%
4%
3%
3%
3%
3%
3%
3%
3%
2%
2%
2%
2%
2%
1%

Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Source: Thomson Reuters LPC

45

Institution
JP Morgan
Wells Fargo & Company
Bank of America Merrill Lynch
PNC Bank
U.S. Bancorp
GE Capital
Madison Capital Funding LLC
BMO Capital Markets
RBS
Fifth Third Bank
SunTrust Bank
KeyBank
PrivateBancorp Inc
CIT Group Inc
Regions Bank
BNP Paribas SA
RBC Capital Markets
Mitsubishi UFJ Financial Group
Citi
NXT Capital LLC

# Deals
136
125
84
81
66
62
56
52
45
32
33
26
24
19
16
7
25
11
11
11

Vol. ($
mm)
5,659
4,491
4,487
3,118
2,876
2,624
2,276
1,892
1,737
1,385
1,330
1,277
900
732
630
543
501
480
434
380

Mkt
Share
(%)
13%
10%
10%
7%
7%
6%
5%
4%
4%
3%
3%
3%
2%
2%
1%
1%
1%
1%
1%
1%

Middle Market Loans: The Lenders

BDCs are active lenders in the middle market space, and this expanding asset class
continues to grow as a provider of capital.

Publicy Traded BDC AUM as of 3/31/14


BDC
AUM ($ in mm)
Ares C apital C orp
$7,800
Prospect C apital C orp
$6,006
FS Investment C orp
$4,078
Apollo Investment C orp
$3,479
Fifth Street Finance C orp
$2,684
PennantPark Investment C orp
$1,257
Golub C apital BDC Inc
$1,254
TPG Specialty Lending Inc
$1,196
New Mountain Finance C orp
$1,180
BlackRock Kelso C apital C orp
$1,106
Solar C apital Ltd
$1,028
TIC C C apital C orp
$960
Medley C apital C orp
$959
Hercules Technology Growth C ap
$891
TC P C apital C orp
$816
THL C redit Inc
$739
Triangle C apital C orp
$690
Solar Senior C apital Ltd
$275
Horizon Technology Finance C or
$229
TriplePoint Venture Growth BDC
$144
$36,768
represents Wells Fargo BDC Equity Research C overage Universe
Source: C ompany Reports, Wells Fargo BDC Equity Research
Ticker
ARC C
PSEC
FSIC
AINV
FSC
PNNT
GBDC
TSLX
NMFC
BKC C
SLRC
TIC C
MC C
HTGC
TC PC
TC RD
TC AP
SUNS
HRZN
TPVG

46

Middle Market Loans: The Lenders


Middle Market Lenders: The BDCs

In its simplest form, a Business Development Company or Registered Investment

Company (BDC/RIC) is a type of closed-end mutual fund designed as a way to lend


to private middle market businesses.

Congress created the BDC in 1980 through Section 54 of the Investment Company
Act.

This BDC/RIC would be a tax pass-through entity, would register and sell shares in
public offerings, and would trade on public exchanges.

The new entity would, in effect, be the first publicly traded mezzanine limited

partnership, with the BDC fund manager acting as the general partner (GP) and the
BDC shareholders taking on the role of limited partners (LP).

Source: Wells Fargo Equity Research, The BDC Investors Almanac, Jan. 2014.
47

Middle Market Loans: The Lenders


Middle Market Lenders: The BDCs
In order to become a BDC/RIC, Congress specified a few rules of the road under the
Small Business Incentive Act of 1980, and these are as follows:

Leverage: A BDC must not fall below an asset coverage ratio (total assets-to-total
debt) of 200%.

Stated differently, a BDCs total leverage (total debt-to-total equity) cannot exceed a
1:1 threshold.

This is more commonly referred to as the 1:1 leverage test for a BDC.
Income requirement: At least 90% of a BDCs gross annual income must be
derived from dividends, interest and realized capital gains from the investment
portfolio.

Source: Wells Fargo Equity Research, The BDC Investors Almanac, Jan. 2014.

48

Middle Market Loans: The Lenders


Middle Market Lenders: The BDCs
In order to become a BDC/RIC, Congress specified a few rules of the road under the
Small Business Incentive Act of 1980, and these are as follows:

Asset diversification. Congress required BDCs to remain adequately diversified to


help limit a BDC from taking unnecessary or concentrated risks.

Thus, to maintain RIC status, a BDC must have at least 70% of its investment portfolio
in qualifying assets.

Qualifying assets are defined as private debt or equity investment in private, or


thinly traded companies (i.e., below $250 million market cap).

In addition, a BDC must have more than 50% of its portfolio in investments that make
up less than 5% of a companys total assets and must limit its investment size to no
more than 25% of a companys total assets.

Source: Wells Fargo Equity Research, The BDC Investors Almanac, Jan. 2014.

49

Middle Market Loans: The Lenders


Middle Market Lenders: The BDCs
In order to become a BDC/RIC, Congress specified a few rules of the road under the Small
Business Incentive Act of 1980, and these are as follows:

Distribution requirement. To maintain RIC status, a BDC must distribute at least


90% of its gross annual income to shareholders.

It is possible to carry over amounts in excess of 90% of gross annual income; however, the
BDC is subject to a 4% excise tax on those spillover earnings.

To the extent that a BDC distributes at least 98% of its gross annual income, the BDC will
not be subject to an excise tax penalty on the remainder.

Managerial assistance: BDCs are required to offer managerial assistance to the smalland medium-sized businesses in which they invest.

Assistance is often provided through board observer rights and active board participation.
Source: Wells Fargo Equity Research, The BDC Investors Almanac, Jan. 2014.
50

Middle Market Loans: The Lenders

BDC Asset Growth

BDC AUM has increased substantially

Year End 2010

$50,000

since the financial crisis.

$ MM

Since year-end 2010, BDC loan balance


(cost value) has increased from $16.5
billion to $43.3 billion (as of Q1 2014).

Assets of publicly traded BDCs have

$50,000

$45,000

$45,000

$40,000

$40,000

$35,000

$35,000

$30,000

$30,000

$25,000

$25,000

$20,000

$20,000

$15,000

$15,000

$10,000

$10,000

Loans at Cost

1Q 2014

4Q 2013

3Q 2013

2Q 2013

1Q 2013

4Q 2012

3Q 2012

2Q 2012

1Q 2012

4Q 2011

3Q 2011

2Q 2011

1Q 2011

4Q 2010

3Q 2010

2Q 2010

1Q 2010

4Q 2009

3Q 2009

2Q 2009

1Q 2009

4Q 2008

3Q 2008

2Q 2008

1Q 2008

4Q 2007

3Q 2007

2Q 2007

1Q 2007

4Q 2006

3Q 2006

2Q 2006

1Q 2006

4Q 2005

3Q 2005

2Q 2005

1Q 2005

4Q 2004

3Q 2004

increased from $25.4 billion at year-end


2010 to $48.3 billion (Q1 2014).

2Q 2004

$0

$5,000

1Q 2004

$5,000

$0

Assets of Publicly Traded BDCs

Source: Company Reports, Wells Fargo Equity Research

Assets include loans plus cash, structured


BDC Capital Raised $ in MM

products and equity.

Since 2009, there have been 22 BDC

IPOs, with more than $2 billion raised.

The market has absorbed 92 follow-ons


by BDCs, with more than $8.9 billion
raised, since 2009.

50

4,500

45

4,000

40

3,500

35

3,000

30

2,500

25

2,000

20

1,500

15

1,000

10

500

0
2000

2001

2002

2003

2004

BDC IPOs ($ mm)


IPO (#)
Source: Company Reports, Wells Fargo Equity Research

51

2005

2006

2007

2008

2009

2010

2011

2012

2013

BDC Follow-Ons ($ mm)

BDC Rights Offerings ($ mm)

FO (#)

Rights Offerings (#)

2014

# Offerings

BDC Equity Capital Raises


5,000

Middle Market CLOs

Middle CLOs: Issuance


22.5

20.0

$20.3

as of 7/22/2014

17.5

15.0

12.5
$B

$11.8
$9.9

10.0

7.5

$10.6

$6.8
$5.4

5.0

$4.2

$3.8

$3.6
$2.2

2.5

$1.5

$0.6
0.0

1999

$1.5

$1.4

2010

2011

$3.9

$0.0
2000

2001

2002

2003

2004

2005

Source: Intex, S&P, Moody's, Wells Fargo Securities, LLC

53

2006

2007

2008

2009

2012

2013

2014

Middle CLOs: Issuance

Since 2011, MM CLO issuance has been 6%-9% of total U.S. CLO Issuance.
US CLO Issuance

100

89.2

90

80

100

90

80

77.7

75.7

as of 7/22/2014

70

70

66.5

60

60
51.9

$B

49.1

50

50

40

40

28.4

30

20.6

20.3

20

15.8

14.2

15.4

13.8

20

14.9
9.9

10

13.8

11.8

10.6

6.8
3.6

30

0.6

1999

2000

2.2

2001

3.8

2002

1.5

2003

Source: Intex, Wells Fargo Securities, LLC

2004

2005

2006

2007

BSL CLO

54

2008

MM CLO

0.5

2.9
-

2009

1.5

4.2

5.4

1.4

10
3.9

0
2010

2011

2012

2013

2014

50

Billions

50
45

40

35

35

30

30

25

25

20

20

15

15

10

10

Source: Intex, Wells Fargo Securities LLC

1.0 MM CLO

55

2.0 MM CLO

Q1 2014

Q1 2013

Q1 2012

Q1 2011

Q1 2010

Q1 2009

Q1 2008

Q1 2007

Q1 2006

Q1 2005

Q1 2004

Q1 2003

0
Q1 2002

Q1 2001

Q1 2000

US MM CLO Outstanding Balance ($ B)

40

45
1.0 = pre-crisis deals
2.0 = post - crisis deals

Billions

Middle CLOs: Market Size History

325

300

300

275

250

225

225

200

200

175

175

150

150

125

125

100

100

Source: Intex, Wells Fargo

1.0 BSL

1.0 MM

56

2.0 BSL

2.0 MM

Q3 2013

Q3 2012

Q3 2011

Q3 2010

Q3 2009

Q3 2008

Q3 2007

Q3 2006

Q3 2005

Q3 2004

Q3 2003

25

Q3 2002

25

Q3 2001

50

Q3 2000

50

Q3 1999

75

Q3 1998

75

Q3 1997

US CLO Outstanding Balance ($ B)

250

275

1.0 = pre-crisis deals


2.0 = post - crisis deals

Billions

325

Q3 1996

Billions

Middle CLOs: Market Size History Compared to BSL CLOs

Middle CLOs: Currently Outstanding MM CLO Universe


MML CLO: 63 Deals / $17B

2001
2002
2003
2004
2005
2006
2007
2010
2011
2012
2013
2014

Trustee
WARF

Curr Bal
($mm) % Cash

% Def.

% B3

#
% Caa1 - Deals
Fail IC
Ca

1
126
77.3%
22.7%
0.0%
0.0%
0
1
8,070
26
0.0%
59.7%
0.0%
40.3%
0
1
7,143
100
0.1%
78.9%
0.0%
11.2%
0
3
5,482
215
22.1%
36.5%
1.2%
22.5%
0
5
2,807
262
12.3%
13.2%
12.0%
6.6%
1
12
3,159
1,844
4.1%
6.0%
8.8%
4.3%
0
13
2,835
5,284
3.8%
1.9%
17.4%
3.9%
0
1
3,807
350
1.4%
2.1%
61.1%
18.9%
0
2
3,359
540
14.2%
1.2%
16.2%
11.4%
0
9
3,412
2,565
4.2%
1.1%
8.6%
8.0%
0
12
3,290
4,551
3.4%
0.2%
4.9%
5.5%
0
3
3,902
1,123
10.4%
0.0%
0.9%
7.5%
0
63
3,215
16,986
4.6%
1.9% 11.3%
6.0%
2
"WARF", "% Assets B3" and "% Caa1-Ca" calculations only include Moody's rated assets.
as of 7/18/2014

# Deals
Fail OC

0
0
0
0
1
0
0
0
0
0
0
0
1

# Deals
Fail Sr
OC

0
0
0
0
0
0
0
0
0
0
0
0
0

Source: Intex, Wells Fargo Securities, LLC

Due to data lags in Intex data, this data do not include all new issue deals.
Data on assets CCC rated assets may be low, as we only show the percentage of publicly
rated assets.

57

Middle CLOs: Spreads


1000

950

950

900

900

850

850

800

800

750

750

700

700

650

650

600

600

550

550

500

500

450

450

400

400

350

350

300

300

250

250

200

200

150

150

100

100

58

BBB

50
0

Jun-14

Mar-14

Dec-13

Sep-13

Jun-13

AA

Mar-13

Dec-12

Mar-12

Dec-11

Jun-12

AAA

Sep-12

Source: Wells Fargo Securities, LLC

Sep-11

Dec-10

Jun-11

Ratings refer to original rating, and spreads are generic. Actual spreads may differ based on structure, WAL,
collateral, and manager. Middle market CLO spreads have more variance from an average.

50

Mar-11

BPs

1000

Middle CLOs: AAA Spread Comparison

In general, since 2012, MM CLO AAAs have priced 25 bps 50 bps wider than BSL CLO

120

120

110

110

100

100

Source: Moody's, S&P, Wells Fargo Securities, LLC

Feb-13

BSL AAA

59

MM AAA

Apr-14

130

Mar-14

130

Feb-14

140

Jan-14

140

Dec-13

150

Nov-13

150

Oct-13

160

Sep-13

160

Aug-13

170

Jul-13

170

Jun-13

180

May-13

180

Apr-13

190

Mar-13

190

Jan-13

200

Dec-12

200

Nov-12

210

Oct-12

210

Sep-12

220

Aug-12

220

Jul-12

230

Jun-12

230

May-12

240

Apr-12

240

Mar-12

250

Feb-12

250

Jan-12

AAA Cpn Spread (bps)

AAA tranches.

Middle CLOs: Spread History


600
550

BPs

600

Ratings refer to original rating, and spreads are generic. Actual spreads may differ based on structure,
WAL, collateral, and manager. Middle market CLO spreads have more variance from an average.

550

500

500

450

450

400

400

350

350

300

300

250

250

200

200

150

150

100

100

Source: Wells Fargo Securities, LLC

AAA

AA

60

BBB

Oct-07

Jul-07

Apr-07

Jan-07

Oct-06

Jul-06

Apr-06

Jan-06

Oct-05

Jul-05

Apr-05

Jan-05

Oct-04

Jul-04

Apr-04

Jul-03

Apr-03

Jan-03

Jan-04

50

Oct-03

50

Middle CLOs: Structure


2012 - 2014 Median Structure
BSL CLO
MM CLO

MM CLOs are less leveraged and

have more credit support than BSL


CLOs.

MM CLOs have less diverse

collateral pool, and typically feature


higher WARFs, which requires more
subordination.

AAA = 55.7%

AAA = 61.0%

The AAA tranche of the average MM


CLO is 56% of the structure,
compared to BSL CLO AAAs, which
are 61% of the structure.

AA = 8.1%
AA = 10.8%

A = 7.8%

A = 7.6%

BBB = 4.9%
BB - 5.0%

BBB = 4.9%
BB = 4.4%
Equity = 10.0%

Equity = 14.9%

Avg. Structure, by Vintage


Source: S&P, Moody's, C reditflux, Intex,
Wells Fargo Securities, LLC
61

Middle CLOs: Structure

MM CLOs are less leveraged and have


more credit support than BSL CLOs.

MM CLOs have less diverse collateral


pool, and typically feature higher
WARFs, which requires more
subordination.

AAA
AA
A
BBB
BB
EQ

2012-2014 CLO Median Structure


MM CLO
BSL CLO
55.7%
60.8%
8.1%
11.3%
7.8%
7.4%
4.9%
5.0%
5.0%
4.4%
14.9%
9.8%

Source: Moody's, S&P, Wells Fargo Securities, LLC

MM CLO AAA tranches have more than


40% credit support, compared to 36%
credit support on BSL CLO AAAs.

Credit Support, based on Assets

AAA
AA
A
BBB
BB

MM CLO
41.3%
33.2%
25.4%
20.5%
15.5%

BSL CLO
36.2%
24.9%
17.5%
12.6%
8.2%

Source: Moody's, S&P, Wells Fargo Securities, LLC

62

Middle CLOs: Asset Coverage

MM CLOs have OC cushions in line with BSL CLOs.


Current Min. OC Test Cushion, by Issue Date

30

25

25

20

20

15

15

10

10

Source: Intex, Wells Fargo Securities, LLC

CLO Min OC Cushion

Jul-14

Jan-14

Jul-13

Jan-13

Jul-12

As of 7/9/2014
MML Min OC Cushion

63

Jan-12

Jul-11

Jul-10

Jan-11

Issue Date

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

-5
Jul-06

-5
Jan-06

Jul-05

Jan-05

Jul-04

Jan-04

Current Min OC Cushion

30

Middle CLOs: Structure

MM CLO collateral portfolios have lower average ratings and are less diverse.

Initial Portfolio

Covenant Limits

Overcollateralization

Cov
CCC
Lite
WARF WAS WAC WAL
17.5% 15.0% 3,340 4.8 7.0 7.5

MM CLO (2012-2014)

Mat.
5.1

WAS (ex
Floors)
5.2

WAS
5.9

BSL CLO (2012-2014)

6.0

3.9

4.6

7.5%

50.0% 2,720 3.8

7.0

BSL CLO (2014 Only)

6.1

3.8

4.4

7.5%

60.0% 2,706 3.8

7.0

Div
35

A/B Trigger
142.8%

A/B Cushion
9.1%

8.0

50

124.0%

10.2%

8.0

58

124.3%

10.6%

as of 7/22/2014
Source: S&P, Moody's, Wells Fargo Securities, LLC

MM CLO collateral assets have higher coupons, and are less likely to be covenant-lite.

64

Middle CLOs: Loan Spreads vs. MM CLO AAA Spreads

Middle market CLOs posted an initial WAS (ex-floors) that is 105 bps wider than BSL
CLOs, on average.
Based on a total debt cost of a MM CLO that is generally about 25 bps50 bps higher, we
see that middle market CLOs offer 50 bps75 bps of additional excess spread.

bps

900

900

MM Loan Spreads vs. MM CLO AAA Spreads

850

850

800

800

750

750

700

700

650

650

600

600

550

550

500

500

450

450

400

400

350

350

300

300

250

250

200

200

150

150

100

100

Middle Market CLO (AAA) Spread


Source: Wells Fargo Securities, LLC, Thomson Reuters, LLC

65

MM Inst. Loan Spread (ex OID)

Feb-14

Nov-13

Aug-13

May-13

Feb-13

Nov-12

Aug-12

May-12

Feb-12

Nov-11

Aug-11

May-11

Feb-11

Nov-10

50
Aug-10

May-10

50

Middle CLOs: Collateral Portfolio Yield

Collateral portfolios in MM CLOs tend to have average yields 150 bps 175 bps higher
than those of BSL CLOs.
This table shows current CLO collateral portfolio coupons, by vintage.

Vintage
2003
2004
2005
2006
2007
2008
2010
2011
2012
2013
2014
Total

MM CLO
Median WAC
Mean WAC
7.41
7.41
6.20
7.13
7.61
8.61
5.50
6.21
4.91
4.91
NA
NA
7.43
7.43
6.41
6.41
5.89
6.18
6.19
6.68
5.91
6.41
5.83
6.15

WAC in %
WAC = C alculated WAC per Intex
as of 7/11/2014
Source: Intex, Wells Fargo Securities, LLC

66

BSL CLO
Median WAC
Mean WAC
5.37
4.91
3.62
4.04
4.06
3.84
4.08
4.19
4.07
4.11
3.77
3.34
3.89
3.89
4.35
4.52
4.60
4.67
4.63
4.69
4.72
4.70
4.39
4.39

Middle CLOs: Collateral

We present WAC and WARF statistics on outstanding MM CLOs as proxy for


risk/reward.

8.0

Collateral Portfolio WAC and WARF, U.S. BSL CLOs Outstanding

7.5

7.0

6.5

MML Current WAC

6.0
Median WAC = 5.89

5.5

5.0

4.5

4.0

3.5
Median WARF = 3,286

3.0
2,000

2,200

2,400

2,600

2,800

3,000

3,200

MML CLO Trustee Reported WARF


Source: Intex, Wells Fargo Securities, LLC

67

as of July 9, 2014
3,400

3,600

3,800

Middle CLOs: Rating Performance: 2009 Downgrades

In 2009, Moodys downgraded fewer MM CLO tranches than BSL CLO tranches.

Dec. 08 Rating

Caa

Ca/C

WR

Aaa

Aa

56.7%

29.8%

5.3%

1.2%

0.6%

1.2%

0.0%

0.0%

5.3%

Aa

1.9%

40.2%

38.3%

8.4%

4.7%

0.9%

0.9%

0.0%

4.7%

0.0%

0.0%

21.7%

42.2%

30.1%

2.4%

0.0%

0.0%

3.6%

Baa

0.0%

0.0%

2.4%

7.3%

48.8%

32.9%

7.3%

1.2%

0.0%

Ba

0.0%

0.0%

0.0%

0.0%

1.9%

36.5%

48.1%

7.7%

5.8%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

50.0%

50.0%

0.0%

U.S. Cash CLOs (ex. SME CLOs)


Dec. 2009 Rating
Baa
Ba
Caa
B
0.6%
0.6%
0.2%
0.3%
26.2%
3.5%
0.2%
0.5%
34.1%
54.8%
4.7%
1.5%
42.8%
22.0%
2.1%
21.3%
0.0%
0.9%
14.6%
47.1%
0.0%
0.0%
0.0%
35.3%
0.0%
8.3%
16.7%
0.0%
0.0%
0.0%
0.0%
0.0%

Ca/C
0.0%
0.2%
1.1%
8.0%
36.1%
41.2%
58.3%
52.2%

WR
2.0%
1.2%
1.1%
3.7%
1.4%
23.5%
16.7%
47.8%

Aaa

Dec. 08 Rating

U.S. Cash SME CLOs


Dec. 2009 Rating
Baa
Ba
B

Aaa
Aa
A
Baa
Ba
B
Caa
Ca/C

Aaa
Aa
34.8% 48.0%
0.2% 16.3%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

A
13.6%
51.8%
2.7%
0.1%
0.0%
0.0%
0.0%
0.0%

Source: Moody's

68

Middle CLOs: Rating Performance: After the Crisis

After 2009, as the credit recovery began to take hold, CLOs in general, including middle

Rating
(as of 7/22/10)

market CLOs, began to see tranche upgrades.


CLO note rating transitions were already showing upgrades when Moodys again
changed its rating methodology in 2011.
Indeed, 26% of middle market CLO notes rated Ba in July 2010 had been upgraded one
year later

Aaa
Aa
A
Baa
Ba
B
Caa
Ca/C

Aaa
86.7%
13.8%
5.8%
2.0%
0.0%
0.0%
0.0%
0.0%

Aa
0.0%
79.3%
13.0%
5.9%
1.4%
0.0%
0.0%
0.0%

A
0.0%
0.0%
72.5%
5.9%
9.6%
0.0%
0.0%
0.0%

U.S. Cash SME CLOs


Rating % as of 7/22/11
Baa
Ba
B
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
76.5%
2.0%
0.0%
15.1%
65.8%
8.2%
8.3%
14.6%
72.9%
2.6%
5.1%
5.1%
0.0%
0.0%
0.0%

Source: Moody's

69

Caa
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
87.2%
0.0%

Ca/C
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
100.0%

WR
13.3%
6.9%
8.7%
7.8%
0.0%
4.2%
0.0%
0.0%

Middle CLOs: Default History

CLO tranche default rates are low: between 1994 and 2013, only 0.52% of rated tranches
have defaulted (including seven tranches currently rated CC).

Per S&P, only six of the 25 CLO tranches that already defaulted were from MM CLOs.
S&P states that three MM CLOs that had defaulted tranches were due to market value
provisions, which are rarely found in CLOs.

S&P Rated U.S. CLO Tranches, 1994-2013

Original rating
AAA
AA
A
BBB
BB
B
Total

Total tranches
1,992
1,005
1,119
1,069
841
115
6,141

Defaulted
tranches
0
0
5
3
14
3
25

Default rate
0.00%
0.00%
0.45%
0.28%
1.66%
2.61%
0.41%

Default Rate, inc. 7


tranches rated CC
0.00%
0.00%
0.45%
0.47%
2.26%
2.61%
0.52%

S&P also counts 7 tranches currently rated CC, which implies default is a "virtual certainty." These
tranches were all originally rated BBB or BB.
Source: S&P

For a complete look at CLO default rates, and a comparison between CLO tranche default rates and
corporate default rates, please see The CLO Salmagundi: CLOs vs. Corporates, Wells Fargo
Research, 3/14/14.
70

Middle Market CLO Managers

Middle CLO Managers: Overview

Balance-sheet MM CLOs are typically issued by nondepository SFCs


that issue loans to small- and middle-market businesses.

These middle-market businesses are typically too large to obtain


financing from small-business lenders and too small to obtain funding
from large commercial banks and the institutional loan markets.

SFCs hone in on this niche and offer a variety of loan products and

financing options that include (but are not limited to); first- and
second-lien term loans, mezzanine debt, revolvers and uni-tranche
loans.

SFCs earn income through loan structuring fees, interest on their loan

products, advisory fees, dividend distributions and servicing fees (fees


earned for collecting payments from the loan portfolio).

72

Middle CLO Managers: Overview

We believe that the manager is more important to MM CLO investors


than to BSL CLO investors, for several reasons.

First, MM CLO managers are typically involved in the origination of the


assets, while BSL CLO managers are essentially choosing from the same
universe of collateral assets in the primary and secondary markets.

Second, middle-market lenders, and by extension MM CLOs, tend to be


more specialized. Lenders may focus on certain types of financing, or on
specific industries, possibly leading to large differences in CLO
collateral stratifications and collateral limits.

Third, MM CLOs may have fewer assets in the collateral pool, making
each asset selection decision more important.

73

Middle CLO Managers: Overview

Finally, transfer of management of a CLO may be more difficult in MM


CLOs than in BSL CLOs, since the MM CLO manager is typically the
underwriter of the loans, or involved in the origination.

Therefore, the manager will likely be more involved in the company


throughout the life of the loan and should have a deeper understanding
of the company and management.

Consequently, a replacement manager could be at a significant


disadvantage assuming management of the portfolio, whereas BSL CLO
assets should largely be familiar to a new CLO manager.

A mitigant to this disadvantage is that banks have had success selling


portfolios, and more managers are familiar with the credits.

74

Middle CLO Managers: Overview

Investors in middle market CLOs need to understand and analyze the


performance of middle market loans.

After all, structural protections and collateral manager have a large effect on
CLO performance but, ultimately, the best structure can not overcome bad
assets.

We believe that investors should carefully examine the particular CLO


managers performance data. While past performance may not provide a look
into the future, we believe that an individual managers record is most
important.

In cases in which the CLO issuer is publicly traded, CLO investors may be able to

access company reports and equity research to get a better understanding of the
companys performance, style and management.

Investors should understand what type of assets are contributed to the CLO.

75

Middle CLO Managers: Servicer Risk

Investors in MM CLOs may wonder about servicer bankruptcy risk.


Although MM CLOs are structured to be bankruptcy remote, insolvency of the

SFC (or its affiliated transaction parties) can potentially change the risk profile
of a MM CLO.

In addition, notes senior in the capital structure may be affected differently than
notes that are subordinate in the capital structure.

Our general rule of bankruptcy is that investors should expect the unexpected.
Isolated cases in sectors such as future-flow transactions, whole business
securitizations and CMBS indicate that the risk of consolidation is not zero.

CLO investors, particularly in financing transactions, should not be complacent,

and may have to be especially vigilant in protecting themselves should the


servicer enter bankruptcy.

76

Middle CLO Managers: Servicer Risk

We recommend that investors check to see if either servicer default or


bankruptcy of the servicer/originator constitutes an event of default
under the indenture (typically section 5.01 of the indenture).

Bankruptcy is often defined as an insolvency event within the


transaction documents.

Typically, the backup servicer (if applicable) will assume the role of
servicing the underlying collateral, acting as the successor servicer.

Some transactions enable the servicer or majority holders to instruct the


backup servicer to sell servicing rights to an eligible third party.

In this case, the backup servicer will typically be responsible to


negotiate the sale and will direct net sales proceeds back to the SFC
(servicer) or its estate
77

Middle CLO Managers: Servicer Risk

The transfer of servicing may have a negative effect on the loan performance of
the underlying collateral.

Since there is a limited trading market for middle market loan collateral,

distressed loans are likely go through a workout with the servicer (rather than
be sold).

A successor servicer may be at a disadvantage when going through the loan


workout process, as it was not involved in the upfront due diligence,
underwriting and structuring of a middle market loan.

MM CLO investors should be aware that a servicing transfer could potentially


adversely affect the recovery values of defaulted collateral.

MM CLO investors should be aware that upon bankruptcy of the SFC (servicer),

there is a potential for a third-party to assume the role of servicer, without


consent of the noteholders (in some cases).

78

Middle CLO Managers: Servicer Risk: History

American Capital (ACAS) approached bankruptcy in Q2 2010, as

corporate debt covenant violations granted lenders the right to


accelerate maturity of $2.4 billion in unsecured debt, which would have
likely led to a default.

However, lenders eventually agreed to a debt exchange plan in June


2010 and avoided bankruptcy.

Moodys reported that while the backup servicers were in place then,
ultimately, ACAS remained as the servicer.

Moodys covered this case in a 2011 report that pointed out that
manager and servicer problems had little effect on CLOs during the
financial crisis (CLO Interest, April 2011).

79

Middle CLO Managers: Overview

We present the top 10 MM CLO managers, by count, according to Intex data.


We also present deal summaries on the CLOs for these CLO managers.
These deal summaries should help illustrate the difference in manager style,

and how some MM CLOs are actually blends of MM and BSL loans.
We also note that not all structures are the same; some CLOs may actually
be bilateral lending facilities structured with CLO technology.
Manager
Golub C apital Incorporated
Ivy Asset Management C orp.
NewStar
GSC Partners
Denali C apital LLC
Fortress Investment C orp
NXT C apital Investment Advisers
MC F C apital Management
C erberus
GSO/Blackstone Debt Funds Management

Deal #
8
7
6
6
5
4
3
3
3
3

Issued
mm)
3,415
2,689
2,584
2,512
2,537
2,223
1,023
938
1,597
1,392

($ Outstanding
($ mm)
3,137
1,531
2,064
529
1,118
2,070
1,023
938
916
575

Source: Intex, Wells Fargo Securities


As of 7/23/2014

Some managers may have more CLOs outstanding, but we only include those CLOs in Intex with
recent updates. For example, Fortress has more CLOs than listed, but they are not in Intex.
80

Middle CLO Managers: Overview

These deal summaries should help illustrate the difference in manager style,
and how some MM CLOs are actually blends of MM and BSL loans.

For example, Denali Capital CLOs have a smaller allocation to MM loans than
true originator MM CLOs, and therefore have higher diversity scores.

Platforms have different strategies, which makes comparing certain metrics in


some MM CLOs less worthwhile, due to the collateral differences.

For example, Cerberus deals are less levered, and have higher WARFs but
much higher asset WACs, than traditional MM issuers such as NewStar.

This is because the Cerberus platform is pursuing a different strategy than


more traditional MM lenders such as NewStar.

We also note that not all structures are the same; some CLOs may actually
be bilateral lending facilities structured with CLO technology.

81

Middle CLO Managers: Golub Capital

Factor

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

Asset
WAC

CLO Deal Name

Manager

GOLUB INTERNATIONAL LOAN I

Golub C apital Incorporated

73%

500.0

366.4

415.0

Mar-06

3,503

50

7.64

GOLUB C APITAL PARTNERS FUNDING 2007-1

Golub C apital Incorporated

64%

400.0

255.7

285.8

Mar-07

2,948

3,679

42

7.33

Asset
WAS
(bps)
614

GOLUB C APITAL BDC 2010-1

Golub C apital Incorporated

100%

350.0

350.0

358.1

Jul-10

3,232

3,663

178

7.49

700

GOLUB C APITAL PARTNERS C LO 12

Golub C apital Incorporated

100%

250.6

250.6

253.7

Jan-12

3,125

3,658

259

6.89

661

GOLUB C APITAL PARTNERS C LO 16

Golub C apital Incorporated

100%

502.5

502.5

502.1

Aug-13

3,686

3,515

193

6.95

661

GOLUB C APITAL PARTNERS C LO 17

Golub C apital Incorporated

100%

556.2

556.2

553.1

Nov-13

3,311

224

5.99

577

GOLUB C APITAL PARTNERS C LO 18(M)

Golub C apital Incorporated

100%

453.1

453.1

Mar-14

223

6.73

GOLUB C APITAL BDC C LO 2014

Golub C apital Incorporated

100%

Jun-14

3,500

205

6.88

Total
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

402.6

402.6

3,415

3,137

2,368

SR OC Test

Min OC Test

Min Test

CLO Deal Name

Manager

Asset
Reinv. WAC
Issued End
%

GOLUB INTERNATIONAL LOAN I

Golub C apital Incorporated

Mar-06

Aug-13

7.64

24.0

125.9

24.0

125.9

18.7

131.2

28.0

37.0

GOLUB C APITAL PARTNERS FUNDING 2007-1 Golub C apital Incorporated

Mar-07

Mar-13

7.33

0.0

0.0

0.0

0.0

0.0

0.0

28.9

37.0

GOLUB C APITAL BDC 2010-1

Golub C apital Incorporated

Jul-10

Jul-15

7.49

6.0

158.0

6.0

158.0

3.5

160.5

37.0

34.0

GOLUB C APITAL PARTNERS C LO 12

Golub C apital Incorporated

Jan-12

Mar-15

6.89

11.4

144.8

6.2

133.5

6.2

133.5

34.0

30.0

GOLUB C APITAL PARTNERS C LO 16

Golub C apital Incorporated

Aug-13

Jul-16

6.95

9.6

144.8

5.6

130.1

5.6

130.1

44.0

43.0

GOLUB C APITAL PARTNERS C LO 17

Golub C apital Incorporated

Nov-13

Oct-17

5.99

10.8

142.8

5.8

121.4

5.8

121.4

48.0

46.0

GOLUB C APITAL PARTNERS C LO 18(M)

Golub C apital Incorporated

Mar-14

Apr-18

6.73

9.0

156.0

6.0

128.4

6.0

128.4

0.0

0.0

GOLUB C APITAL BDC C LO 2014

Golub C apital Incorporated

Jun-14

Apr-18

6.88

9.0

153.6

5.0

136.1

5.0

136.1

35.0

32.0

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

82

Cushion Trigger Cushion Trigger

Div.
Div.
Score
Cushion Trigger Score Trigger

Middle CLO Managers: Ivy Hill

Factor

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

Asset
WAC

Asset
WAS
(bps)

CLO Deal Name

Manager

EMPORIA PREFERRED FUNDING I

Ivy Asset Management C orp. 10%

426.0

42.4

8.3

Oct-05

2,900

3,490

6.70

C OLTS 2005-2 LTD

Ivy Asset Management C orp. 16%

407.0

67.0

11.9

Jan-06

6.41

EMPORIA PREFERRED FUNDING II LTD

Ivy Asset Management C orp. 33%

365.9

122.2

98.9

Jun-06

2,883

2,676

175

5.56

420

EMPORIA PREFERRED FUNDING III

Ivy Asset Management C orp. 70%

414.8

289.0

269.4

Mar-07

3,012

2,958

73

5.36

399

IVY HILL MIDDLE MARKET C REDIT FUND III

Ivy Asset Management C orp. 100%

315.0

315.0

316.6

Dec-11

3,043

3,254

306

5.82

559

IVY HILL MIDDLE MARKET C REDIT FUND IV

Ivy Asset Management C orp. 84%

400.0

336.0

341.4

Jul-12

2,988

3,286

210

5.69

544

IVY HILL MIDDLE MARKET C REDIT FUND VII

Ivy Asset Management C orp. 100%

359.8

359.8

Oct-13

3,264

3,237

241

5.72

2,689

1,531

Total
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

475

1,047

SR OC Test

Min OC Test

Min Test

CLO Deal Name

Manager

Asset
Reinv. WAC
Issued End
%

EMPORIA PREFERRED FUNDING I

Ivy Asset Management C orp.

Oct-05

Oct-11

6.70

0.0

0.0

0.0

0.0

0.0

0.0

1.0

C OLTS 2005-2 LTD

Ivy Asset Management C orp.

Jan-06

Feb-09

6.41

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

EMPORIA PREFERRED FUNDING II LTD

Ivy Asset Management C orp.

Jun-06

Jul-12

5.56

129.3

118.2

7.9

101.7

5.9

103.7

19.0

40.0

Cushion Trigger Cushion Trigger

Div.
Div.
Score
Cushion Trigger Score Trigger
40.0

EMPORIA PREFERRED FUNDING III

Ivy Asset Management C orp.

Mar-07

Apr-13

5.36

39.7

112.4

4.2

101.4

1.7

103.9

40.0

45.0

IVY HILL MIDDLE MARKET C REDIT FUND III

Ivy Asset Management C orp.

Dec-11 Mar-15

5.82

11.9

159.6

6.4

114.1

6.4

114.1

51.0

46.0

IVY HILL MIDDLE MARKET C REDIT FUND IV

Ivy Asset Management C orp.

Jul-12

Jul-15

5.69

8.3

125.8

8.3

125.8

8.3

125.8

55.0

50.0

IVY HILL MIDDLE MARKET C REDIT FUND VII

Ivy Asset Management C orp.

Oct-13

Oct-17

5.72

10.1

135.1

5.1

108.3

3.6

109.8

53.0

43.0

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

83

Middle CLO Managers: NewStar

CLO Deal Name

Manager Factor

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

Asset
WAC

Asset
WAS
(bps)

NEWSTAR C OMMERC IAL LOAN TRUST 2006-1

NewStar

37%

500.0

183.8

181.1

Jun-06

3,695

73

5.53

616

NEWSTAR C OMMERC IAL LOAN TRUST 2007-1

NewStar

72%

600.0

431.2

438.1

Jun-07

77

4.91

577

NEWSTAR C OMMERC IAL LOAN FUNDING 2012-2

NewStar

100%

325.9

325.9

325.9

Dec-12

3,044

3,221

312

5.72

543

NEWSTAR C OMMERC IAL LOAN FUNDING 2013-1

NewStar

91%

400.0

365.0

368.7

Sep-13

3,286

247

5.64

539

NEWSTAR C OMMERC IAL LOAN FUNDING 2014-1

NewStar

100%

348.4

348.4

Apr-14

3,000

272

5.71

NEWSTAR ARLINGTON SENIOR LOAN PROGRAM

NewStar

100%

409.4

409.4

Jun-14

2,950

256

5.95

Total
2,584
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

2,064

1,314

SR OC Test

Min OC Test

Min Test

CLO Deal Name

Asset
Reinv. WAC
Manager Issued End
%

NEWSTAR C OMMERC IAL LOAN TRUST 2006-1

NewStar

Jun-06

Jun-11

5.53

0.0

0.0

0.0

0.0

0.0

0.0

28.1

NEWSTAR C OMMERC IAL LOAN TRUST 2007-1

NewStar

Jun-07

May-13

4.91

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

NEWSTAR C OMMERC IAL LOAN FUNDING 2012-2

NewStar

Dec-12

Jan-16

5.72

9.4

141.0

3.4

113.2

3.4

113.2

39.0

30.0

Cushion Trigger Cushion Trigger

Div.
Div.
Score
Cushion Trigger Score Trigger
32.0

NEWSTAR C OMMERC IAL LOAN FUNDING 2013-1

NewStar

Sep-13 Sep-16

5.64

21.6

131.7

6.3

108.6

6.3

108.6

41.0

30.0

NEWSTAR C OMMERC IAL LOAN FUNDING 2014-1

NewStar

Apr-14

Apr-18

5.71

9.0

139.5

3.0

110.6

3.0

110.6

33.0

30.0

NEWSTAR ARLINGTON SENIOR LOAN PROGRAM

NewStar

Jun-14

Jul-18

5.95

9.0

138.5

3.0

108.2

3.0

108.2

40.0

38.0

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

84

Middle CLO Managers: GSC Partners

Factor

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

Asset
WAC

Asset
WAS
(bps)

CLO Deal Name

Manager

GSC PARTNERS C DO FUND IV

GSC Partners 23%

440.0

100.0

26.2

Dec-03

2,741

7,143

7.41

700

GSC PARTNERS C DO FUND V

GSC Partners 14%

600.0

81.0

44.1

Dec-04

2,863

5,624

5.63

421

GSC PARTNERS C DO FUND VI

GSC Partners 10%

400.0

41.0

7.7

Oct-05

2,988

9.56

GSC C APITAL C ORP. LOAN FUNDING 2005-1

GSC Partners 8%

300.0

24.0

4.1

Jan-06

3,008

10,000

9.35

850

GSC PARTNERS C DO FUND VII

GSC Partners 29%

413.1

121.1

103.9

May-06

3,111

3,489

241

5.46

441

GSC GROUP C DO FUND VIII

GSC Partners 45%

359.4

161.8

150.7

Mar-07

2,531

3,001

71

5.27

497

Total
2,512
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

529

337

Asset
Reinv. WAC
Issued End
%

SR OC Test

Min OC Test

Div.
Div.
Score
Cushion Trigger Score Trigger

CLO Deal Name

Manager

GSC PARTNERS C DO FUND IV

GSC Partners Dec-03

Jan-09

7.41

0.0

0.0

0.0

0.0

0.0

0.0

4.0

42.0

GSC PARTNERS C DO FUND V

GSC Partners Dec-04 May-10

5.63

0.0

0.0

0.0

0.0

0.0

0.0

4.0

60.0

GSC PARTNERS C DO FUND VI

GSC Partners Oct-05

Oct-11

9.56

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

GSC C APITAL C ORP. LOAN FUNDING 2005-1

GSC Partners Jan-06

Feb-12

9.35

0.0

0.0

0.0

0.0

0.0

0.0

1.0

45.0

GSC PARTNERS C DO FUND VII

GSC Partners May-06 May-12

5.46

1408.3

123.0

12.2

104.8

12.2

104.8

13.0

48.0

GSC GROUP C DO FUND VIII

GSC Partners Mar-07

5.27

28.8

113.2

5.7

101.2

4.7

102.2

30.0

52.0

Apr-14

Cushion Trigger Cushion Trigger

Min Test

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

85

Middle CLO Managers: Denali Capital

Factor

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

Asset
WAC

Asset
WAS
(bps)

CLO Deal Name

Manager

DENALI C APITAL C LO IV

Denali C apital LLC 3%

400.0

13.8

3.0

Aug-04

2,424

3,403

9.60

448

DENALI C APITAL C LO V

Denali C apital LLC 18%

410.0

73.1

56.6

Sep-05

2,525

2,660

167

4.80

356

DENALI C APITAL C LO VI

Denali C apital LLC 23%

500.9

115.6

88.5

Mar-06

2,431

2,688

154

4.98

366

DENALI C APITAL C LO VII

Denali C apital LLC 100%

812.9

812.9

787.6

May-07

2,453

2,674

42

4.56

356

413.3

103.0

87.4

Jul-07

3,130

2,997

255

5.05

381

SPRING ROAD C LO 2007-1 Denali C apital LLC 25%

Total
2,537
1,118
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

Asset
Reinv. WAC
Issued End
%

1,023

SR OC Test

Min OC Test

Div.
Div.
Score
Cushion Trigger Score Trigger

CLO Deal Name

Manager

DENALI C APITAL C LO IV

Denali C apital LLC Aug-04 Sep-10

9.60

0.0

0.0

0.0

0.0

0.0

0.0

2.7

80.0

DENALI C APITAL C LO V

Denali C apital LLC Sep-05

Oct-11

4.80

899.3

108.1

90.0

104.9

89.0

105.9

22.2

65.0

DENALI C APITAL C LO VI

Denali C apital LLC Mar-06

Jul-12

4.98

153.4

114.0

6.8

102.8

6.8

102.8

29.8

80.0

DENALI C APITAL C LO VII

Denali C apital LLC May-07

SPRING ROAD C LO 2007-1 Denali C apital LLC Jul-07

Cushion Trigger Cushion Trigger

Min Test

Jul-14

4.56

6.5

110.0

2.1

101.8

0.9

103.0

93.5

87.0

Jul-13

5.05

641.2

123.3

23.8

102.8

22.3

104.3

34.0

35.0

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

We do not include Denali Capital CLO X, issued in 2013, due to the high allocation to BSL loans.
86

Middle CLO Managers: Fortress Investment Corp.

Factor

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

Asset
WAC

Asset
WAS
(bps)

CLO Deal Name

Manager

FORTRESS C REDIT FUNDING III

Fortress Investment C orp

82%

840.0

686.9

745.9

Aug-06

2,586

49

6.45

596

FORTRESS C REDIT FUNDING V

Fortress Investment C orp

100%

408.8

408.8

406.1

Aug-12

2,806

3,182

281

6.40

622

171.8

Aug-12

2,779

3,070

281

6.10

605

Apr-14

3,750

267

7.71

FORTRESS C REDIT FUNDING VI

Fortress Investment C orp

100%

173.9

173.9

FORTRESS C REDIT OPPORTUNITIES III C LO

Fortress Investment C orp

100%

800.0

800.0

2,223

2,070

Total
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

1,324

SR OC Test

Min OC Test

Min Test

CLO Deal Name

Manager

Asset
Reinv. WAC
Issued End
%

FORTRESS C REDIT FUNDING III

Fortress Investment C orp

Aug-06 Sep-13

6.45

26.4

126.8

18.9

120.5

6.9

132.5

28.7

28.0

FORTRESS C REDIT FUNDING V

Fortress Investment C orp

Aug-12 Aug-15

6.40

12.3

139.0

5.7

109.5

4.7

110.5

33.0

28.0

Cushion Trigger Cushion Trigger

Div.
Div.
Score
Cushion Trigger Score Trigger

FORTRESS C REDIT FUNDING VI

Fortress Investment C orp

Aug-12 Aug-15

6.10

11.6

139.0

5.2

109.5

4.2

110.5

32.0

28.0

FORTRESS C REDIT OPPORTUNITIES III C LO

Fortress Investment C orp

Apr-14

7.71

17.0

153.6

5.0

119.7

3.7

121.0

40.0

35.0

Oct-17

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

Fortress has more CLOs than listed, but they are not in Intex.

87

Middle CLO Managers: NXT Capital

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

Asset
WAC

Asset
WAS
(bps)

CLO Deal Name

Manager

Factor

NXT C APITAL C LO 2012-1

NXT C apital Investment Advisers

100%

307.9

307.9

302.7

May-12

3,228

3,580

309

6.42

620

NXT C APITAL C LO 2013-1

NXT C apital Investment Advisers

100%

357.9

357.9

352.2

Mar-13

3,724

3,491

236

6.24

603

NXT C APITAL C LO 2014-1

NXT C apital Investment Advisers

100%

357.4

357.4

May-14

3,500

255

6.32

Total
1,023
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

1,023

655

SR OC Test

Min OC Test

Min Test

CLO Deal Name

Manager

Asset
Reinv. WAC
Issued End
%

NXT C APITAL C LO 2012-1

NXT C apital Investment Advisers

May-12

Jul-15

6.42

10.1

144.6

4.6

112.1

3.1

113.6

31.0

25.0

NXT C APITAL C LO 2013-1

NXT C apital Investment Advisers

Mar-13

Apr-16

6.24

11.0

142.8

5.2

109.4

3.7

110.9

39.0

34.0

NXT C APITAL C LO 2014-1

NXT C apital Investment Advisers

May-14 Apr-18

6.32

10.0

150.7

4.5

111.0

3.0

112.5

35.0

32.0

Cushion Trigger Cushion Trigger

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

88

Div.
Div.
Score
Cushion Trigger Score Trigger

Middle CLO Managers: MCF (Madison Capital)

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

Asset
WAC

Asset
WAS
(bps)

CLO Deal Name

Manager

Factor

MC F C LO I

MC F C apital Management

100%

327.7

327.7

327.0

Feb-13

3,268

3,471

247

6.18

600

MC F C LO II

MC F C apital Management

100%

304.1

304.1

302.3

Mar-13

3,323

3,467

257

6.13

594

MC F C LO III

MC F C apital Management

100%

305.9

305.9

301.8

Jan-14

233

6.15

581

938
938
Total
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

931

CLO Deal Name

Manager

Asset
Reinv. WAC
Issued End
%

SR OC Test

Min OC Test

Cushion Trigger Cushion Trigger

Min Test

Div.
Div.
Score
Cushion Trigger Score Trigger

MC F C LO I

MC F C apital Management

Feb-13

Apr-16

6.18

10.9

141.2

5.2

108.4

4.2

109.4

39.0

35.0

MC F C LO II

MC F C apital Management

Mar-13

Apr-16

6.13

11.1

142.7

5.4

107.4

4.4

108.4

39.0

32.0

MC F C LO III

MC F C apital Management

Jan-14

Jan-17

6.15

10.9

141.3

5.2

109.6

4.2

110.6

0.0

0.0

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

89

Middle CLO Managers: Cerberus

CLO Deal Name

Manager Factor

A5 FUNDING 2012

C erberus 15%

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

525.0

80.6

299.0

Apr-12

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

4,048

544

9.14

935

Asset
WAC

Asset
WAS
(bps)

ABLEC O C APITAL

C erberus 61%

614.3

377.1

366.0

Sep-13

338

8.92

892

C ERBERUS ONSHORE II C LO

C erberus 100%

458.2

458.2

450.2

Jan-14

4,265

251

9.03

885

Total
1,597
916
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

CLO Deal Name

Asset
Reinv. WAC
Manager Issued End
%

A5 FUNDING 2012

C erberus Apr-12

May-13

1,115

SR OC Test

Min OC Test

Cushion Trigger Cushion Trigger

9.14

401.3

167.7

194.1

Min Test

Div.
Div.
Score
Cushion Trigger Score Trigger

157.5

194.1

157.5

20.0

22.0

ABLEC O C APITAL

C erberus Sep-13 Sep-13

8.92

132.5

159.1

38.6

130.8

38.6

130.8

0.0

0.0

C ERBERUS ONSHORE II C LO

C erberus Jan-14

9.03

12.0

180.3

6.0

147.6

6.0

147.6

28.0

22.0

May-15

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

90

Middle CLO Managers: GSO / Blackstone

CLO Deal Name

Manager

Factor

Orig Bal
($ mm)

Curr
Bal ($
mm)

Collat.
Bal ($
mm)

Issue
Date

Orig
WARF

Stated
WARF

Wt. Avg.
Liab.
Spread
(bps)

Asset
WAC

FRIEDBERGMILSTEIN PRIVATE C APITAL FUND I GSO/Blackstone 21%

584.0

119.9

6.9

Dec-04

2,814

6.31

MAPS C LO FUND I

GSO/Blackstone 14%

408.2

55.4

1.7

Dec-05

3,063

15.50

MAPS C LO FUND II

GSO/Blackstone 100%

400.0

400.0

384.4

Jun-07

2,762

2,374

Total
1,392
Data on recent deals may be missing as collateral fields are updated
Source: Intex, Wells Fargo Securities
As of 7/23/2014

575

393

Asset
Reinv. WAC
Issued End
%

SR OC Test

Min OC Test

3.84

344

Min Test

Div.
Div.
Score
Cushion Trigger Score Trigger

CLO Deal Name

Manager

FRIEDBERGMILSTEIN PRIVATE C APITAL FUND I

GSO/Blackstone Dec-04

6.31

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

MAPS C LO FUND I

GSO/Blackstone Dec-05 Dec-10 15.50

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

MAPS C LO FUND II

GSO/Blackstone Jun-07

8.8

120.2

3.0

103.2

1.4

104.8

61.0

55.0

Jan-11
Jul-14

Cushion Trigger Cushion Trigger

60

Asset
WAS
(bps)

3.84

Note: Min Test is OC Test lowest in the C apital Structure, and includes Interest Diversion Tests
Source: Intex, Wells Fargo Securities
As of 7/23/2014

91

Disclosure Appendix
Additional information is available on request.
This report was prepared by Wells Fargo Securities, LLC.
Important Information for Non-U.S. Recipients
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distribution only to professional investors (Tokutei Toushika) and is not intended for, and should not be relied upon by, ordinary customers (Ippan Toushika).
The ratings stated on the document are not provided by rating agencies registered with the Financial Services Agency of Japan (JFSA) but by group companies of JFSAregistered rating agencies. These group companies may include Moodys Investors Services Inc, Standard & Poors Rating Services and/or Fitch Ratings. Any decisions
to invest in securities or transactions should be made after reviewing policies and methodologies used for assigning credit ratings and assumptions, significance and
limitations of the credit ratings stated on the respective rating agencies websites.
About Wells Fargo Securities, LLC
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limited to Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NYSE, FINRA, NFA and

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Disclosure Appendix
SIPC, Wells Fargo Institutional Securities, LLC, a member of FINRA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, Wells Fargo Bank,
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Important Disclosures Relating to Conflicts of Interest and Potential Conflicts of Interest
Wells Fargo Securities, LLC may sell or buy the subject securities to/from customers on a principal basis or act as a liquidity provider in such securities.
Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC research analysts
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Wells Fargo Securities, LLC Fixed Income Research analysts interact with the firms trading and sales personnel in the ordinary course of business. The firm trades or
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For additional disclosure information please go to: www.wellsfargoresearch.com.
Analysts Certification
The research analyst(s) principally responsible for the report certifies to the following: all views expressed in this research report accurately reflect the analysts personal
views about any and all of the subject securities or issuers discussed; and no part of the research analysts compensation was, is, or will be, directly or indirectly, related
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Wells Fargo Securities, LLC, and Wells Fargo Securities International Limited is a separate legal entity and distinct from
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SECURITIES: NOT FDIC-INSURED * NOT BANK-GUARANTEED * MAY LOSE VALUE

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