Structured Credit Investor | CMOA structure prepped

By March 7, 2017November 20th, 2019In The News

Acis Capital, an affiliate of Highland Capital, is prepping an innovative US$372m CLO. Dubbed ACIS CLO 2017-7, the transaction utilises a capitalised majority-owned affiliate (CMOA) risk retention strategy.

A CMOA structure involves a combination of the capitalised manager vehicle (CMV) and the majority owned affiliate (MOA) approaches and seeks to solve problems associated with each. Hunter Covitz, md at Highland Capital, confirms that the firm considered other structures, but the CMOA suited its requirements most closely.

“The CMV structure works for some managers, as it means you remain the manager and retain a somewhat different standard than with the CMOA,” he explains. “However, the CMOA offers more flexibility, which works for us. Risk retention is so new for everyone and everyone is coming from a different place when approaching it, so there are a lot of different nuances.”

While the CMOA structure forces managers to hold onto the equity piece, Covitz says this wasn’t a significant challenge for the firm, as it is something it has always done. The CMOA approach therefore benefited the firm in the “consistency it offered”, although it was quite complex structurally.

Unlike some managers, Acis has a fund called Acis Loan Funding, which it capitalised in August 2015 with “an eye to being a first mover”. The fund is a “capitalised vehicle with equity we already owned, which was already generating cashflows, and we have since then put more capital in the fund.” It returned 61.77% in 2016 – generated from equity positions in 12 structured finance vehicles – and is now seeking to raise external capital.

Organisationally, Acis therefore incorporates three elements: Acis CLO Management (the originator and registered investment advisor), Acis Capital Management (which has a controlling indirect interest in Acis CLO Management and is also the portfolio services provider to Acis Loan Funding) and Acis Loan Funding (which has a non-controlling indirect interest in Acis CLO Management). Acis Loan Funding is registered in Guernsey and holds a portfolio of loans and CLO equity, and is open to investment from new and existing investors. New CLOs issued by Acis pass the 5% vertical or horizontal risk retention to Acis CLO Management.

Acis chose the CMOA structure to minimise disruption and to streamline the process as much as possible. Covitz comments: “If you’re using the CMV, you essentially have to combine two businesses, which can mean bringing in a whole new management team – a large platform has to then figure out different practises at management level and that can be very complex and quite challenging.”

He adds that a smaller manager may choose the CMV structure, as they may be able to create a new entity and raise capital from scratch. That was not necessary for Acis, however, being a larger firm.

“If you do it from scratch and create a whole new entity, you can get things moving straight away, which can work. A smaller manager can perhaps do this very simply, so a CMV might work for them. For us, however, we’re not a small platform and we weren’t ready to move people around and did not have the need to raise capital from scratch. The CMOA was therefore more suitable for us,” Covitz continues.

The CMOA structure also enables the fund to be dual compliant, meeting risk retention rules for Europe and the US, with the main benefit being the ability to sell the bonds to a wider investor group – particularly in the secondary market. ACIS CLO 2017-7, however, will not be offered to European investors. Covitz says that this is because demand can “come and go” in Europe at the moment, due to factors such as volatility in the price of the euro and how many dollars European firms have to spend in their budget.

Provisionally rated by Moody’s, the transaction – which is expected to price this month – comprises US$260.75m Aaa rated class A notes, US$50.25m Aa2 class Bs, US$20.25m A2 class Cs, US$26.25m Baa3 class Ds and US$14.5m Ba3 class Es. The CLO has a weighted average spread of 3.75%, a weighted average coupon of 7%, a weighted average recovery rate of 47.5% and a WAL of 6.25 years. It has a WARF score of 2650 and a diversity score of 65.

Investors have responded with enthusiasm to the deal, due both to the success of the structure and because of demand for new issuance. “This was the first risk retention compliant deal for us and so it was proof of concept, which is important for all managers, not just us. It’s what is needed for risk retention, whether a small or large player. It’s good to see in action,” Covitz observes.

He concludes: “Generally, any new issue deal is also a plus for the market. There have been a lot of refi/repricings in 2017, but less new issuance.”