Prospect makes investments in the equity and debt tranches of U.S. Collateralized Loan Obligations ("CLOs"). Prospect focuses on relative value and makes both majority and minority CLO investments in both the primary and secondary markets. Prospect invests with experienced collateral managers with extensive track records.
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 often 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 to invest at discounted prices.
Prospect often focuses on investing in the majority of the CLO equity tranche when the opportunity is available due to multiple benefits, which can include:
- The right to redeem, refinance, or reset the transaction following the debt non-call period (typically 2 to 3 years)
- Potential to invest in CLO equity at a lower price than minority investors
- Ability to negotiate lower management fees across its portfolio
- Right to appoint a successor CLO collateral manager in certain circumstances