Hedge Fund GSO Capital Partners has launched its first collateralized loan obligation since taking over the collateralized debt obligation business of RBC Capital Markets last summer. The $400 million Gale Force 1 CLO comprises about 50% middle-market loans. Fifteen percent is carved out for a mix of second liens, mezzanine debt and high yield, and the balance is large syndicated loans. Pricing on the Triple-A liabilities is LIBOR plus 27 basis points.
Over the summer GSO, led by Bennett Goodman, bought the CDO business led by Dan Smith, the managing partner and head of debt investments at the bank (LMW, 7/25). The business included four CDOs with accounts of about $1.5 billion. "We've known Dan for a long time," Goodman said. "They're terrific credit guys with an outstanding track record and culturally they're a great fit. Their historical default rate is approximately 1 1/2%, which is significantly below the market norm."
In the future, Goodman estimates the CLO group will have close to $5 billion in assets under management and expects to launch about two to three deals a year. Smith is optimistic his team will begin working on another CLO in the second quarter. GSO currently has about $4.5 billion of assets under management, with about $2.5 billion in its hedge fund.
With the hedge fund and CLO under the same name, Goodman and Smith said the crossover opportunities have been beneficial. "It is a strategic fit because the CLO group follows over 250 highly leveraged companies in their portfolios," Goodman said. "They all have future capital needs and represent potential investment opportunities for the hedge fund. The CLO group benefits from the deal origination activities of the hedge fund whereby they gain access to proprietary deal flow not available to other CLOs." Smith agreed. "I think there is a lot of synergy," he explained. "On paper we expected there to be some, but the reality is, there is a lot more cross-polenization that is happening than we had anticipated."
The senior portfolio team on the investment side includes: Smith, Lee Shaiman, Melissa Marano and Jane Lee on the operations side. Merrill Lynch is the underwriter for the Gale Force 1 CLO based on a previous relationship Smith and his team had with the bank. Merrill was the lead arranger on Hudson Straights, an earlier CLO Smith had worked on. "They have done a good job for us, historically," Smith said. "They have good distribution and we like their structuring team."