11/13/2009

Babson to Swallow Jefferies CLO Division

Babson Capital has agreed to purchase a Jefferies Capital unit that manages five collateralized loan obligations.

With the takeover, Babson will assume management duties for the issues: St. James River CLO; Clear Lake CLO; Diamond Lake CLO; Summit Lake CLO and Victoria Falls CLO. The MassMutual Financial subsidiary will also absorb the personnel running those deals - a group that encompasses fewer than 10 people.

The CLOs involved were issued from 2005 to 2007 and have a total face value of $1.8 billion. Unlike some deals that lately have undergone management changes, they have performed well. The sale is set to go through shortly, after the CLOs' investors approve the management transfers.

The arrangement would largely remove Jefferies from the CLO-management business. Aside from the assignments it is shedding, the New York broker-dealer only runs one such transaction - through a business-lending venture called Jefferies Finance that it launched in partnership with Boston-based Babson in 2004.

Jefferies' motivation for selling its CLO operation stems from efforts by parent Jefferies & Co. to focus on its investment-banking activities, including work on securitizations. The company has been expanding its banking teams for more than a year, and apparently didn't consider CLO management a big part of its franchise. It also gets to share some revenues with Babson going forward.

Babson, for its part, already ranks among the largest CLO managers with almost two dozen deals under its wings. It sees the takeover as a play on economies of scale, even with the addition of the Jefferies staffers. "If you manage six or seven deals, you can run 20 without adding staff," one market player said.

The pact also extends a longstanding relationship between Jefferies and Babson. In addition to their work on Jefferies Finance, some of the companies' top executives are known to be personal friends. MassMutual serves as a Jefferies backer as well, and at one point was rumored to be taking over the company. Jefferies has enlisted Babson to handle some duties on its past CLOs too.

Meanwhile, Babson is among a group of firms that have shown interest in issuing new CLOs in the U.S. The flow of such deals has been largely frozen this year. But as investors have begun showing an increased appetite for risk, BlackRock, Invesco, Pimco and others have thought about bringing offerings to market.

One source noted that a large buyer of CLO equity recently noted it would end a recent holdout from new investments in the sector. Deutsche Bank and J.P. Morgan are among underwriters that are eager to bring CLOs to market. But industry participants say that's unlikely to happen until next year.

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