ICG returns with second loan fund

Intermediate Capital Group has raised E340m from institutions including several UK accounts for a new CDO fund to invest in leveraged loans.

Intermediate Capital Group (ICG), the quoted mezzanine provider and alternative asset manager, has raised E340m from institutional investors to invest in leveraged loans, mezzanine debt and high yield bonds. The equity tranche of the deal comprises E40m.

“With Promus II, we continue to follow our strategy to build a diversified alternative asset management operation around our core mezzanine business. Like our first loan-based product, Promus II has a very conservative structure with a slow ramp-up. I’m very pleased that we have closed the deal at this stage given market conditions”, said Andrew Phillips, a director at ICG.

ICG started fundraising in February of this year, working with JP Morgan to raise E300m. According to Phillips, an unusually large number of commitments came from UK institutions, helping the fund to exceed its initial target, with European investors also participating.

Unlike traditional securitisations, CDO structures use collateral that will typically not have been acquired by the time investors make the investment decision. Instead, the underlying assets are acquired over a period of time early on in a fund’s life. This makes portfolio building a crucial task for the CDO manager.

In the case of CDOs like Promus, which use mainly leveraged loans as collateral, the difficulty is that there is currently a shortage of quality loans coming out of the LBO market, and that supply in the secondary market remains limited as well. CDO managers deploy different strategies to overcome this problem, with ICG using a revolving structure based on a bank facility designed to give the manager the flexibility to invest the fund over the course of a number of years if needs be. The new fund’s flexibility is further enhanced by a mandate that allows for part of the capital to be invested in high yield debt and mezzanine, although the bulk will be used to build a portfolio of loans.

ICG closed Promus I in October 2001, having raised E450m for investment in leveraged loans.

Promus II has closed at a time when the outlook for CDOs is increasingly problematic. A large number of CDO funds, particularly those that are using investment grade debt as collateral, are currently experiencing performance problems. There are currently over 70 CDO funds thought to have exposure to disgraced WorldCom alone.