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Structured credit round up: CLOs… just in time

Cheyne Capital Management sold one of the largest-ever European arbitrage CLOs last month via Nomura. The €1 billion Cheyne Credit Opportunity CDO 1 incorporated several structural features to overcome problems that could arise from its relatively large size. In contrast to typical CLOs, which are normally half the size, 40% ramped up at launch and have around a year to complete sourcing loans, Cheyne Credit Opportunity has a two-year time period to ramp up fully. This extra flexibility will be particularly useful. The competition for leveraged loans will be greater than ever, given that an estimated 35 CLOs are operating this year, compared with about 25 last year.

In order to minimize negative carry, the €139 million equity is structured as just-in-time equity, a technique borrowed from its Diamond CFO deals. Cheyne also incorporated a super-senior €552 million variable rate note, which is also drawn over time. Consequently, only €308 million of initial cash goes into the structure, which more than takes care of the €230 million of mezzanine and leveraged loans being warehoused.

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