StoneCastle founder details process to create first bank credit CLO securitization since 2008

By Cristal Cody

Tupelo, Miss., Oct. 16 – The $250.5 million Community Funding CLO, Ltd. deal, the first pooled bank credit securitization offering since 2008, that closed on Thursday was about two years in the making.

Josh Siegel, managing partner and founder of StoneCastle Partners, LLC, said in an interview with Prospect News on Friday that the world is very different post-financial crisis versus the pre-financial crisis markets.

“The very aspect of how to do a bank credit securitization has changed,” he said. “The ratings agencies look at the world differently. The tax rules have changed. It was almost an entirely fresh start to reinvent what I invented originally in 1999, and we had to recreate the product again in a way that it would be structured [for] ratings rules and sellable to investors.”

The original form of pooled bank credit securitizations, the TruPS CDO, was created and first issued by Salomon Smith Barney, now Citigroup Inc., in 1999 by the founders of StoneCastle Partners, who formerly worked at Citigroup, according to StoneCastle.

StoneCastle executives began asking themselves if it was possible to do a bank securitization again in mid-2013, Siegel said.

The New York City-based closed-end management investment company signed with Citigroup Global Markets Inc. in the first quarter of 2015 to do the transaction.

“It’s been six, seven months of solid work just from the official kick-off, but a couple of years of research,” he said.

Siegel said nothing had to be changed with the assets, but the group had to find a way to go back to investors since banks had not accessed the market in seven years.

“We spent a lot of time getting to understand how they think about Tier 2 capital,” he said. “It was really just reassessing. It’s quite an orchestration and logistics challenge to get 35 banks and the financing all done for closing on the same day.”

StoneCastle Financial Corp., which announced the deal’s closing on Thursday, invested $45.5 million in the preferred share tranche, which priced with an average 7% yield.

The static cash flow CDO also sold $205 million of 5.75% class A senior secured fixed-rate notes (A3//) that are due in 2027.

Citigroup lined up investors for the senior tranche, Siegel said.

“Citigroup went out to a portion of the CLO senior investor market and found people who had experience in the small bank securitization market and had been buyers of the paper pre-crisis and were willing to take a look at something very interesting and with a structure that had a lot of equity protection, just under 20% of the whole structure,” he said.

The deal is collateralized by subordinated debt issued by U.S. community banks or their holding companies, according to Moody’s Investors Service.

The proceeds from the offering were primarily used to fund direct capital investments into 35 community and regional banks from 24 states.

One bank involved in the transaction, Simsbury, Conn.-based SBT Bancorp, Inc., said Friday that it borrowed $7.5 million at 6.75% via the Community Funding CLO, with a rebate to 3.35% through February 2016. Proceeds from the subordinated loan were used to redeem preferreds issued to the Treasury as part of the company’s participation in the Small Business Lending Fund program and for growth.

The CLO was not structured to be compliant with risk retention regulations, but the way the transaction is structured, it “effectively meets it,” Siegel said.

StoneCastle would like to do another similar transaction in the future.

“How much more is a question of how many banks want it and investor demand,” Siegel said.

“The most important aspect is that it has brought a form of capital potentially back to small community banks that haven’t had access. It really could usher in a new age of letting smaller banks be more competitive with large banks.”

© 2015 Prospect News.
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