January 2022 | Issue 241

Marathon sees value in Sofr CLO tranche over fixed-rate option

Sayed Kadiri headshot
Sayed Kadiri
Marathon Asset Management stole a march on other CLO issuers by including a Sofr tranche as part of a new issue transaction on 10 November via Bank of America. Officials at the company say the Sofr tranche makes a compelling alternative to a fixed-rate tranche.
Marathon CLO 2021-17 is a five-year reinvestment CLO and issued $24.75 million of double A-rated notes paying Sofr plus 210 basis points. This sits alongside $22 million of pari passu notes paying Libor plus 190bp.
“The all-in coupon of Libor plus 190bp is about 2.05%, whereas the Sofr tranche equates to 2.15%,” says Jonathon Siatkowski, director of CLO structuring and management at Marathon. “So that spread basis of 20bp shrinks to 10bp currently, and when you run the bonds with their forward rates through the two-year non-call period, it only becomes 3-5bp more expensive to issue the Sofr tranche.”

New York-based Siatkowski says the economics make sense when compared to fixed-rate CLO liabilities. “Fixed-rate CLO tranches price off the swaps curve, which is currently much higher than either Libor or Sofr given the expectations of inflation, and once you factor in the weighted average life of the bond, fixed-rate double As have been pricing to an all-in rate that is closer to 3%.”
“We said we were open to selling Sofr liabilities if the opportunity arises”
Jason Friedman, Global head of business development | Marathon
Marathon’s global head of business development Jason Friedman says the firm has never feared taking on new opportunities, having been one of the first issuers to incorporate a yen-denominated swap into a CLO back in 2014.
“We said to our arrangers that we are open to selling Sofr liabilities if the opportunity arises,” says New York-based Friedman. “There was interest and we pursued it. Once the spread adjustment had been determined, we made the decision of splitting the double As so that there was also a Libor component. That way everyone could see how the Sofr tranche priced relative to a Libor tranche.”
The spread adjustment of 20bp was wider than the 10.83bp spot basis on 10 November, but inside the Alternative Reference Rate Committees’ 26bp recommendation.
As Creditflux goes to press, the only other CLO transaction in 2021 to issue a Sofr tranche was OCP CLO 2015-10, which is managed by Onex Credit Partners. Nomura arranged a reset of the CLO on 28 October, with Sofr triple As paying 124bp over the benchmark for a 15bp adjustment over a pari passu Libor equivalent tranche.
The Onex CLO has a shorter tenor than the Marathon new issue. It ends its reinvestment period in three years.
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Global credit funds & CLO's
January 2022 | Issue 241
Published in London & New York.
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