Prospect makes investments in U.S. CLO equity and opportunistically invests in the debt tranches of U.S. Collateralized Loan Obligations ("CLOs"). Prospect focuses on relative value and makes both majority and minority CLOS equity investments in both primary and secondary markets. Prospect only invests with experienced collateral managers with extensive track records of managing senior secured loans and CLOs before the 2008 credit crisis.
CLOs are diversified pools of primarily First lien, floating-rate corporate loans. Sample borrowers in the senior secured corporate loan market include Albertsons, Burger King, Delta Air Lines, and Dell.
The primary market allows Prospect to negotiate the legal documents to favor the equity tranche, negotiate CLO collateral manager fees to enhance returns, and leverage Prospect’s team of credit professionals to optimize initial portfolio construction. The secondary market allows Prospect to take advantage of volatile markets and make investments at discounted prices.
Prospect focuses on investing in the majority of the CLO equity tranche when the opportunity is available due to multiple benefits, which can include:
- Opportunity to purchase CLO equity from arrangers at a lower price than minority investors
- Ability to negotiate lower management fees across its portfolio
- The right to redeem, refinance, or reset the transaction following the debt non-call period (typically 2 to 3 years)
- Right to appoint a successor CLO collateral manager after a CLO collateral manager default