Duke Street Capital Debt Management announces Tap issue to take Duchess I CDO Fund to EUR 1bn

11 February 2002

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Duke Street Capital Debt Management (DSCDM) has launched the first ever Tap issue for a CDO fund, to increase the size of its Duchess I CDO Fund, which closed last June on EUR 750m (18 June 2001, page 3), to EUR 1bn â€“ making it the largest CDO fund in Europe focusing on leveraged loans. The vehicle, which is incorporated in Luxembourg, will use the additional capital to purchase debt assets exclusively Euro denominated and principally invested in senior secured loans. The Tap issue will provide existing investors with the opportunity to increase their holding in Duchess I and give new investors the chance to buy into the fund. The use of a Tap issue capitalises on the existing financial structure of the CDO, raising new funds at substantially lower cost than would be the case for a new issue. The move to increase the size of Duchess highlights the popularity of CDO funds, at a time when the buyout market is suffering from the banksâ€™ unwillingness to provide large debt packages in an uncertain economic climate. It also illustrates the recent trend in the European CDO market to stay away from high yield bonds, seen now as too risky, in favour of higher-quality leveraged loans (the most recent CDO fund to do this is Barclays Capital Asset Managementâ€™s second CDO fund, Jubilee CDO I S.A, (14 January 2002, page 6)). In fact, in extending Duchess, DSCDM has altered the structure of the fund so that it now includes a higher proportion of senior debt; due to the higher credit quality achieved through the Tap issue and accordant restructuring Standard & Poors is expected to upgrade the rating on the B notes from BB to BB+.

Through the Tap issue, Duchess I will increase the size of the Class A, Class B and Secured Income notes as follows: 230m new Class A notes will be issued at 52 basis points above Euribor (E+52), rated AAA/Aaa by Moodyâ€™s/Standard & Poors; 9m new Class B notes will be issued, rated Ba2/BB+ (Moodys/S&P); and 11m new Secured Income notes (unrated). The Tap issue will enable DSCDM to adjust the asset mix as follows: Senior Bank Loans will be a minimum of 75% (previously 65%); HY Bonds and Mezzanine Total will be a maximum of 25% (previously 35%); HY Bonds will be a maximum of 20% (previously 10%); the weighted average credit rating will be less than or equal to 2220 (previously less than or equal to 2500); and the diversity score will be greater than or equal to 35 (previously greater than or equal to 30). The Tap issue is being arranged and structured by CIBC World Markets, who have been working alongside DSCDM in the marketing of the notes.To date 85% of the existing EUR 750m fund has been invested in a portfolio consisting primarily of senior secured loans (75%), mezzanine loans (10%) and high yield bonds (15%) denominated in both Euro and Sterling. It is anticipated that the full EUR 1bn will be fully invested in the next six months.