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Allied Irish Bank launches first Irish CLO Back  
Collateralised Loan Obligations are set to become a popular alternative investment strategy for pension funds and insurance companies in Europe. AIBCM have just launched the E350 million Tara Hill Fund, one of the first CLOs in Europe, and the first by an Irish company.
Allied Irish banks has launched Tara Hill BV, a E350 million Collateralised Debt Obligation (CDO). It is a fund which will invest in a range of senior secured loans, mezzanine loans and high yield bonds in the buoyant European buy-out market.

Tara Hill is sponsored and advised by AIB Capital Markets and the transaction was arranged by Morgan Stanley Dean Witter.

Tara Hill has been funded through the issuance of E323 million of Moodys rated AAA, AA, BAA and BA along with a E41 million unrated equity tranche. Investors in Tara Hill comprise of a broad range of European insurance companies, pension funds, banks and other financial institutions. 25 per cent of the unrated equity tranche has been retained by AIB.

Tara Hill will be an arbitrage CDO. This means that it will raise money from its investors who will be buying the various levels of rated paper and equity, and in turn will invest in the European buy-out market.

According to Robert Gallagher, head of AIBCM’s Special Finance Unit, the vehicle is an attractive way for pension and insurance companies to gain access to the underlying collateral: namely the European buyout market.

He explained that investors choose which level of risk they wish to invest in for example the senior notes have limited risk associated with them while the subordinated notes and equity have more risk. The rate of return on the investment is linked to the amount of risk the investor takes on.

However it is the subordinated notes that offer the real opportunity for this type of vehicle. It is these that are most likely to offer the high returns, and because pension and insurance companies are unlikely to be able to participate directly in the European buyout market, the structure offers a way to be involved in a less risky way.

Reaction from the market has been very positive, with all of the layers oversubscribed before the project was launched at the end of January. In fact, AIB plans to launch a further CLO later in the year.

Arbitrage CLOs are formed specifically to invest in loan and bond assets, with investment advice provided by experienced asset mangers, in this case AIBCM, and are a common feature of the US debt market. According to AIB over $50 billion was issued in the CLO arbitrage market in the US during 2000.

Not only is the Tara Hill vehicle the first CLO structure to be advised by an Irish advisor it is one of the first arbitrage CDO’s to be issued in Europe to date. This structure differs to other securitisation products where a chunk of the bank’s own debt is taken off of the balance sheet e.g. mortgage backed securities. In the Tara Hill CLO, the structure is actually using the money raised by selling rated notes to investors, to fund corporate expansions and management in companies which are seen as offering a good return.

AIB has been an active participant in the European leveraged loan and buy-out markets for since 1990 where it has acted as an arranger of deals. The leveraged finance division consists of 25 professionals with offices in London, Dublin and New York. Recent arranging roles for AIB included the E836 million BC Partners led Cantrell and Cochrane management buyout, the E530 million Industri Kapital led Oriflame buyout and the E515 million Candover led privatisation of Clondalkin plc.

Transaction summary
Tara Hill CLO, will be a euro denominated arbitrage CLO to be advised by AIB Capital Markets plc. It will invest in a diversified portfolio of predominantly European sub-investment grade credits consisting of Senior Secured Loans, Mezzanine Loans and High Yield Bonds. AIB Capital Markets will act as investment advisor and as such will select collateral and making investment recommendations

The leveraged finance activity within AIBCM is carried out by the Special Finance Unit. SFU is a group dedicated to leveraged finance focusing on underwriting, arranging, and participating in European leveraged transactions.

Subordinated notes
According to Gallagher the subordinated notes represent a leveraged exposure to the underlying collateral. The unrated equity tranche will be worth approximately E41 million of the total Tara Hill fund size of E369 million. AIBCM will hold approximately one quarter of the subordinated notes.

According to Gallagher ‘The CLO initiative represents a key long term business plan for AIBCM, and it reflects the company’s view of how the debt markets in Europe are developing.’

Tara Hill, which is listed as a special purpose investment vehicle in the Netherlands, expects to have its asset composition dominated by leveraged loans to European companies (80 per cent). Company bonds will take up 20 per cent of the assets. Industry distribution emphasis ‘old world’ companies with areas like chemicals, plastics and rubber, beverage, food, printing publishing and containers, packaging and glass set to be favoured. ‘New world’ investments will be minimal because of the perceived volatility in returns and cash flow. Investments are expected to be made throughput the eurozone with a strong emphasis on France, Germany and Scandinavian countries.

The TARA Hill CDO will rely heavily on AIBCM’s established expertise in senior secured and mezzanine loans, and its access to leveraged loan and mezzanine market deals flow.

European buy-out market
Estimates of the European buy-out market put the compound annual growth rate (CAGR)of the sector at 40 per cent over the last four years. The UK, French and Scandinavian markets have been key drivers during that time. According to AIB this growth has been driven by an emphasis on shareholder value, a focus on core activities, the enhanced buyout infrastructure, cultural changes and the development of the Euro. The UK buyout market is currently three times the size of the French and 10 times the size of the German market in relative terms. AIBCM believes the outlook going forward on both the demand and supply side is very positive going forward.

The rationale behind this vehicle is that corporate restructurings and buy and build strategies continue to provide significant opportunities for financial buyers and management teams.

Rationale for AIB CLO
The proposed CLO is a key long-term strategic initiative for AIBCM in the area of acquisition finance and it ties in with the bank’s goal of increasing external funds under management (currently AIB has E40 billion under management).

According to Gallagher Tara Hill will be looking for opportunities in companies with strong sponsors, good management, in a stable industry and having strong cash generation capability. The standard criteria will be to invest in countries with low political/ regulatory/ legal risk and in sectors in which AIBCM has prior experience.

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