Launch of Euro High Yld Fund
INTERMEDIATE CAPITAL GROUP PLC
12 August 1999
ICG and Morgan Stanley Dean Witter launch EuroCredit CDO I,
the first European high yield Collateralized Debt Obligation
Intermediate Capital Group PLC today announces the launch of a Euro 400m
European high yield fund arranged by Morgan Stanley Dean Witter.
ICG, Europe's leading specialist provider of mezzanine finance, will act as
investment adviser to the fund on the purchase and management of the
portfolio. ICG managing director, Tom Attwood, said, 'The sustained high
levels of activity in mergers and acquisitions will continue to provide
opportunities for attractive investments in high yield assets.' ICG's
established track record in acquisition finance should enable it to source an
attractive and diverse portfolio, consisting of high yield bonds, senior
secured loans, and mezzanine loans.
The fund is a collateralized debt obligation ('CDO'), which provides leverage
on the portfolio of high yield assets through rated liabilities. CDOs have
been an important vehicle for investing in US high yield, with estimates
exceeding $70 billion invested, and Morgan Stanley Dean Witter has been a
leader in the development of the US CDO and high yield markets. The
liabilities of the CDO will be rated by Moody's Investor Services. 'As the
first CDO for European high yield, EuroCredit CDO I is a milestone in the
development of the European high
Yield market, underlining our position as pre-eminent underwriter in the
European credit market', highlights Jason Maratos, head of European high yield
at Morgan Stanley Dean Witter.
Tom Attwood said, 'The raising of this fund is an important move for ICG. We
believe that the European buy-out and high yield bond markets will continue to
grow significantly over the next few years. This CDO offers UK and European
investors their first opportunity to participate in that market via a balanced
portfolio of local high yield credits, all denominated in Euros. The fund is
divided into various tranches providing different risk return profiles, so
that it appeals to investors with differing investment objectives. In light
of ICG's experience and track record in high yielding assets, this fund is a
natural extension of our existing fund management activities and one which we
believe offers a real and attractive alternative to traditional investment
opportunities.'
ICG will be investing in 25% of the subordinated notes of the fund, an
investment of around Euro15m. Other investors include insurance companies and
banks across Europe.
Enquiries:
Tom Attwood/Andrew Phillips, ICG 0171 628 9898
Gill Ackers, Brunswick 0171 404 5959
Euart Glendinning, Morgan Stanley Dean Witter 0171 425 4942
This information does not constitute an offer of securities for sale in the
United States. Securities may not be offered or sold in the United States
absent registration under the Securities Act of 1933 or an exemption from such
registration. Any offering of securities to be made in the United States will
be made by means of an offering memorandum that may be obtained from the
issuer and that will contain detailed information about the issuer and the
management, as well as financial statements.
Notes to Editors:
1. EuroCredit CDO I, Limited
EuroCredit CDO I will invest in a diversified portfolio of European sub-
investment grade credits consisting of high yield bonds, senior secured
loans and mezzanine loans ('the collateral'). Intermediate Capital
Managers Ltd, a wholly-owned subsidiary of Intermediate Capital Group PLC
(ICG), is the Investment Adviser for the CDO and is responsible for
selecting the portfolio and advising on ongoing investment decisions. The
fund will be invested over the course of the next few months commencing
with investments in existing issues. It is expected that these initial
investments will include some of the largest MBOs in Europe, for which ICG
has already arranged or provided mezzanine finance, such as Elis of France
and recent large issues of debt and bonds including AstraZeneca Speciality
Chemicals and Colt Telecom of the UK and Kappa Packaging of Holland.
Purchase of the portfolio will be financed by the issuance of various
classes of securities, all denominated in Euros, providing different risk
return profiles to meet investors' differing investment objectives. These
include Class I and Class II Senior Notes with high investment grade
ratings of Aaa and Aa2, respectively, Second Priority Notes rated Baa3,
Third Priority Notes rated Ba3 and unrated Subordinated Notes.
The cashflows from the portfolio investments will be allocated to these
securities on a priority basis, with the highest rated securities receiving
the highest priority and so on down the scale. This cascade of risk and
reward provides the leverage to enable the Subordinated Notes to offer
investors the potential for higher returns than would be received by
investing directly in the high yield assets. These Subordinated Notes
constitute Euro 60 million of the total fund size of approximately Euro 400
million. Investors in the fund could therefore expect annual yields of
between 62bp over Euribor and more than 15%, depending on their chosen risk
profile.
2. Collateralised Debt Obligations explained
Collateralised debt obligations (CDOs) are special purpose vehicles that
invest in a diversified portfolio of assets. The investments in CDOs are
funded through the issuance of several classes of securities, the repayment
of which is linked to the performance of the underlying securities that
serve as collateral for the CDO liabilities. The technology is similar to
that used by banks for securitizing their loan portfolios; however, with
CDOs it is used as a leveraged investment vehicle rather than a capital
management tool.
The investments are managed by an experienced investment manager, and the
securities issued by the CDO are tranched into rated and unrated classes,
which vary according to the expected return and corresponding risk. The
underlying portfolios typically consist of non-investment grade debt
instruments, which may include high yield bonds, leveraged loans and other
similar instruments.
This information does not constitute an offer of securities for sale in the
United States. Securities may not be offered or sold in the United States
absent registration under the Securities Act of 1933 or an exemption from such
registration. Any offering of securities to be made in the United States will
be made by means of an offering memorandum that may be obtained from the
issuer and that will contain detailed information about the issuer and the
management, as well as financial statements.
3. Overview of the markets for Collateralised Debt Obligations and High
Yield Bonds
The market for CDOs is the fastest growing sector of the asset backed
securities market. The first CDO was created over ten years ago, and it is
now an established instrument for investors and an attractive vehicle for
asset managers. Since the first CDO in 1988 through the first quarter of
1999, Moody's has rated over 200 CDOs with a rated volume in excess of $70
billion.
The earliest CDOs were backed by portfolios of US high yield bonds. Later
transactions introduced additional asset classes, but the majority of CDOs
continue to include a portion of high yield bonds. The high yield bond
market in the US is well-developed and has been a viable source of funding
for non-investment grade US companies for over 20 years.
The high yield bond market for European borrowers is a more recent
development, commencing in the last several years, and has experienced
rapid growth since then. New issue volume in the global high yield market
since 1997 totalled $330.9 billion, while new issue volume in the European
high yield market over the same period totalled $35.4 billion.
4. Intermediate Capital Group
ICG is the leading arranger and provider of mezzanine finance to non-
investment grade companies in Europe. It was founded in 1989 and
subsequently listed on the London Stock Exchange in 1994. The company has
a market capitalization of £266 million and balance sheet resources of
approximately £500 million.
ICG has arranged or provided in excess of £1.2 billion of mezzanine finance
in 120 transactions. It retained for its own account over £750 million of
this, with the remainder either invested on behalf of its fund management
clients or syndicated to third parties. As of January 1999, ICG's
portfolio totalled £394 million of assets, which consisted of investments in
61 different companies, and it managed an additional £175 million for its
fund management clients. Up to January 1999, ICG has realised 46
investments, resulting in an average annual rate of return of between 20%
and 25%.
ICG has offices in London and Paris and employs 18 professionals, who
together have many years of investment experience and of analysing credit
and providing mezzanine finance throughout Europe. ICG is regulated by the
Investment Management Regulatory Organisation Limited (IMRO).
5. Morgan Stanley Dean Witter
Morgan Stanley Dean Witter & Co. is a global financial services firm and a
market leader in securities, asset management and credit services. The
Company has offices in New York, London, Tokyo, Hong Kong, and other
principal financial centres around the world and has 456 securities branch
offices throughout the United States.
High Yield Underwriting Capabilities
* Morgan Stanley Dean Witter is a leader in the high yield market globally.
* In 1998, it won the IFR award of 'European High Yield Bond House' of the
year.
* Morgan Stanley Dean Witter was the largest underwriter of European High
Yield Bonds in 1998.
Innovative CDO Structuring Capabilities
* Morgan Stanley Dean Witter was one of the earliest firms to develop CDO
structuring technology and placement capabilities, and remains a market
leader.
* As of June 1999, Morgan Stanley Dean Witter has completed 50 CDOs, the
total volume of which exceeds $15 billion.
Depth of Resources in CDOs
The Morgan Stanley Dean Witter CDO team senior management has been largely
intact since its inception in 1988:
* Over 30 professionals dedicated to structuring, executing and marketing
CDO transactions.
* 5 dedicated traders providing liquidity for Morgan Stanley Dean Witter
CDO transactions.
* Research coverage of CDO product, provided by Asset Backed Securities
research group.
International Distribution
An institutional salesforce of over 700 professionals worldwide and a Dean
Witter salesforce network spanning 381 offices and 50 middle market offices
in the U.S. facilitate broad distribution and provide access to new
investors.
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