European CDOs on the rise

Duke Street today prices Europe’s largest arbitrage CDO fund.

Duke Street Capital has launched its first collateralised debt obligation (CDO) fund, Duchess I, to exploit growth in the European leveraged loan market.

The E750m fund, which is currently the largest arbitrage CDO vehicle in Europe, focuses on senior and mezzanine loans within the leveraged finance market.

Duchess differs from its European counterparts by relying less on the high yield bond sector: 65 per cent of the fund is dedicated to senior debt, 20 per cent to mezzanine and only 15 per cent to high yield.

The notes will have a 12 year final maturity, up to a seven year re-investment period, and a four year non-call period. The fund will be backed by a diverse portfolio of non-investment grade euro and sterling denominated investments.

Ian Hazelton, chief executive Duke Street Capital Debt Management, believes that the size of the fund, which will close at the end of June, will provide additional debt capacity for the leveraged buyout market which will allow it to hold “substantial positions in each asset”. “Going forward, we believe that CDOs will become a core component of buyout funding, as bank capacity for large buyouts is being stretched,” he added.

The timing of Duke Street’s initiative looks good. Mitchell Lench, who manages the European CDO team at Fitch IBCA, believes the European arbitrage CDO market took off last year, driven by further expansion in the high yield market in Europe.

“Relative to the US it is small nevertheless there has been a considerable amount of growth in leverage loans, high yield bonds and mezzanine debt. This year we can expect to see something like 12-15 transactions in the European market,” says Lench.

Duke Street’s inaugural foray into managing CDO products is part of a plan to leverage the firm’s knowledge of the buyout market. The buyout specialist is keen to offer other CDO vehicles in the future and has plans to offer investors alternative opportunities to invest in leveraged loans as well.