PRELIMINARY OFFERING MEMORANDUM — CONFIDENTIAL
SUBJECT TO COMPLETION AND AMENDMENT
Dated August 4, 2023
DRIFTWOOD CLO 2023-I
$400,000,000
$364,000,000 Aggregate Principal Amount of Secured Notes (Rated) $36,000,000 Aggregate Liquidation Preference of Subordinated Notes (Unrated)
Co-Issued by
Driftwood CLO 2023-I, Ltd. (a Cayman Islands exempted company with limited liability)
and
Driftwood CLO 2023-I, LLC (a Delaware limited liability company)
The Notes are being offered and sold pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the "Securities Act"). The Notes have NOT been and will NOT be registered under the Securities Act or any state securities laws. The Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except to qualified institutional buyers ("QIBs") in reliance on the exemption from registration provided by Rule 144A under the Securities Act. The Notes are being offered outside the United States to non-U.S. persons in offshore transactions in reliance on Regulation S under the Securities Act.
The Notes are obligations of Driftwood CLO 2023-I, Ltd. and Driftwood CLO 2023-I, LLC (collectively, the "Co-Issuers") only and are not obligations of, and are not guaranteed by, Driftwood Absolute Return Fund Ltd., Driftwood Credit Management LLC, or any of their respective affiliates (other than the Co-Issuers). No governmental agency, the Federal Deposit Insurance Corporation, or any other agency or instrumentality has insured or guaranteed the Notes.
Reference Rate: Compounded SOFR (with 26253 fallback convention)
Day Count Convention: Actual/360
Stated Maturity: October 15, 2036
Payment Dates: Quarterly on the 15th of January, April, July, and October of each year, commencing January 15, 2024
Collateral Manager: Driftwood Credit Management LLC
The Secured Notes are expected to be rated by Brindoval Analytical Services Inc. ("CAS") and Ridgeline Credit Ratings LLC ("RCR"). The Subordinated Notes will not be rated. The ratings set forth above are preliminary and are subject to change prior to the Closing Date. A rating is not a recommendation to purchase, hold, or sell the Notes and does not address the likelihood of timely payment of interest or principal, market value, or suitability for any particular investor.
THE TERMS SET FORTH IN THIS PRELIMINARY OFFERING MEMORANDUM ARE PRELIMINARY AND ARE SUBJECT TO CHANGE. THE FINAL TERMS OF THE NOTES WILL BE SET FORTH IN A FINAL OFFERING MEMORANDUM.
Lead Placement Agent
Meridian Atlantic Securities LLC 383 Madison Avenue, 22nd Floor New York, NY 10179
Co-Placement Agent
Northbridge Capital Markets Inc. 1251 Avenue of the Americas, 34th Floor New York, NY 10020
Trustee
Ironclad Trust Company, N.A. 100 Wall Street, Suite 1650 New York, NY 10005
The date of this Preliminary Offering Memorandum is August 4, 2023.
The preliminary terms set forth herein are subject to change. The ratings reflected herein are preliminary ratings only and are subject to confirmation upon satisfaction of all conditions to closing. There can be no assurance that such conditions will be satisfied or that the final terms of the Notes will not differ materially from the terms set forth herein.
IMPORTANT NOTICES AND DISCLAIMERS
Offering Restrictions. The Notes described in this Preliminary Offering Memorandum (this "Offering Memorandum") are being offered and sold only (i) in the United States, to persons who are qualified institutional buyers ("QIBs") as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), in transactions exempt from registration under the Securities Act and (ii) outside the United States, to non-U.S. persons in offshore transactions in compliance with Regulation S under the Securities Act. The Notes have not been and will not be registered under the Securities Act or the securities laws of any state of the United States, and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the Securities Act) except in transactions exempt from, or not subject to, the registration requirements of the Securities Act.
No public offering of the Notes is being made in the United States or in any other jurisdiction. The Notes have not been approved or disapproved by the U.S. Securities and Exchange Commission (the "SEC"), any state securities commission, or any other regulatory authority, nor has any such authority passed upon or endorsed the merits of this offering or the accuracy or adequacy of this Offering Memorandum. Any representation to the contrary is a criminal offense.
The Notes are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation (the "FDIC"), any other governmental agency, or any other person or entity. The Notes are obligations solely of the Co-Issuers, and no other person or entity, including, without limitation, Driftwood Absolute Return Fund Ltd. ("DARF"), Driftwood Credit Management LLC ("DCM" or the "Collateral Manager"), Meridian Atlantic Securities LLC (the "Lead Placement Agent"), Northbridge Capital Markets Inc. (the "Co-Placement Agent"), Ironclad Trust Company, N.A. (the "Trustee"), Havenwood Bank, N.A. (the "Account Bank"), or any of their respective affiliates, directors, officers, employees, or agents, has any obligation, contingent or otherwise, to make any payments on the Notes or to provide any additional funds or credit support to the Co-Issuers. The Notes are limited recourse obligations of the Co-Issuers, payable solely from the Collateral and other assets of the Co-Issuers as described herein.
Confidentiality. This Offering Memorandum is confidential and has been prepared by the Co-Issuers and the Collateral Manager solely for use by prospective investors in connection with the offering described herein. This Offering Memorandum is personal to each recipient and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire the Notes. Distribution of this Offering Memorandum to any person other than the prospective investor and any person retained to advise such prospective investor with respect to the purchase of the Notes is unauthorized, and any disclosure of any of the contents of this Offering Memorandum, without the prior written consent of Meridian Atlantic Securities LLC, is prohibited. Each prospective investor, by accepting delivery of this Offering Memorandum, agrees to the foregoing and to make no photocopies or electronic copies of this Offering Memorandum or any documents referred to herein, except as may be necessary for the purpose of evaluating an investment in the Notes.
Forward-Looking Statements. This Offering Memorandum contains certain forward-looking statements within the meaning of the federal securities laws. These statements include, but are not limited to, statements regarding the expected performance of the Collateral, the anticipated composition of the portfolio, the expected cash flows on the Notes, the expected ratings of the Notes, and other statements that are not historical facts. Words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "targets," and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are based on the current expectations, assumptions, estimates, and projections of the Co-Issuers and the Collateral Manager and are subject to significant risks, uncertainties, and contingencies, many of which are beyond the control of the Co-Issuers and the Collateral Manager.
Prospective investors are cautioned that no assurance can be given that the projections, estimates, or expectations reflected in or suggested by such forward-looking statements will be achieved. Actual results may differ materially from those projected. Forward-looking statements speak only as of the date of this Offering Memorandum, and neither the Co-Issuers nor the Collateral Manager undertakes any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by applicable law.
Responsibility Statements. The information contained in this Offering Memorandum has been provided by the Collateral Manager and the Co-Issuers. Neither the Lead Placement Agent, the Co-Placement Agent, the Trustee, the Account Bank, nor any of their respective affiliates, directors, officers, employees, agents, or counsel has independently verified any of the information contained herein. No representation or warranty, express or implied, is made by any of the Lead Placement Agent, the Co-Placement Agent, the Trustee, the Account Bank, or any of their respective affiliates, directors, officers, employees, agents, or counsel as to the accuracy, completeness, or sufficiency of the information set forth herein or any other information provided in connection with the offering of the Notes.
This Offering Memorandum has been prepared with the assistance of Calderwood & Harkness LLP, counsel to the Co-Issuers, and Meridian Atlantic Securities LLC, the Lead Placement Agent. Neither Calderwood & Harkness LLP nor any other counsel to any transaction party assumes any responsibility for the accuracy, completeness, or sufficiency of the information contained herein.
Each prospective investor must make, and shall be deemed to have made, its own independent investigation and appraisal of the risks, merits, and suitability of an investment in the Notes. No person has been authorized to give any information or to make any representation in connection with the offering or sale of the Notes other than as contained herein, and, if given or made, such information or representation must not be relied upon as having been authorized by the Co-Issuers, the Collateral Manager, the Placement Agents, the Trustee, or any other party.
No Legal, Tax, or Investment Advice
This Offering Memorandum does not constitute legal, tax, business, or investment advice. The tax and other matters described herein may not apply to all holders of Notes and, in some cases, may apply differently depending upon the individual circumstances of a particular holder. Prospective investors should consult their own legal, tax, financial, and other advisors before making an investment decision with respect to the Notes. Neither the Co-Issuers, the Collateral Manager, nor the Placement Agents are acting as a fiduciary or advisor to any prospective investor.
Ratings Disclaimer. The Secured Notes are expected to receive preliminary ratings from Brindoval Analytical Services Inc. ("CAS") and Ridgeline Credit Ratings LLC ("RCR"), each a nationally recognized statistical rating organization ("NRSRO"). The preliminary ratings set forth on the cover page and elsewhere in this Offering Memorandum are subject to confirmation upon satisfaction of all conditions to the Closing Date and may change prior to the Closing Date.
A credit rating addresses only the creditworthiness of the rated obligations and the probability of default. A credit rating does not address the market value, liquidity, or suitability of the Notes for any particular investor. A credit rating is not a recommendation to purchase, hold, or sell any security and may be revised, suspended, or withdrawn at any time by the assigning rating agency in its sole discretion. No assurance can be given that a credit rating will remain unchanged for any given period of time or that a credit rating will not be lowered, suspended, or withdrawn by the assigning rating agency if, in such rating agency's judgment, circumstances so warrant. A downgrade, suspension, or withdrawal of any rating assigned to the Notes may adversely affect the market price and liquidity of such Notes.
Prospective investors should not rely solely on ratings in making an investment decision with respect to the Notes.
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Offering Memorandum and the transaction documents referred to herein. Capitalized terms used but not otherwise defined herein have the meanings assigned to them in the Glossary of Defined Terms or in the Indenture. Prospective investors should carefully review the entire Offering Memorandum and the transaction documents before making an investment decision.
The Issuers. Issuer: Driftwood CLO 2023-I, Ltd. (the "Issuer"), a Cayman Islands exempted company with limited liability incorporated under the Companies Act (As Revised) of the Cayman Islands, Cayman Registration No. EX-382916. The Issuer's registered office is located at PO Box 4927, Windward House, 3rd Floor, George Town, Grand Cayman KY1-1306, Cayman Islands. The Issuer is a newly formed special purpose entity established solely for the purpose of acquiring and holding the collateral obligations, entering into the transaction documents, and issuing the Notes. The Issuer has no prior operating history, no employees, and no assets other than those to be acquired in connection with the transactions described herein.
Co-Issuer: Driftwood CLO 2023-I, LLC (the "Co-Issuer" and, together with the Issuer, the "Co-Issuers"), a Delaware limited liability company, DE File No. 7429831, formed under the Delaware Limited Liability Company Act. The Co-Issuer's registered agent is National Registered Agents Inc., 1209 Orange Street, Wilmington, Delaware 19801. The Co-Issuer is a wholly owned subsidiary of the Issuer and has been established solely for the purpose of co-issuing the Notes. The Co-Issuer is classified as a disregarded entity for U.S. federal income tax purposes, and all of its assets and liabilities are treated as assets and liabilities of the Issuer.
The Issuer and the Co-Issuer have been structured as bankruptcy-remote entities. Neither the Issuer nor the Co-Issuer is expected to have any significant assets other than the Collateral, the transaction accounts, and rights under the transaction documents. The activities of the Co-Issuers are limited to those activities described in the Indenture and the other transaction documents.
The Collateral Manager
Collateral Manager: Driftwood Credit Management LLC ("DCM" or the "Collateral Manager"), a Delaware limited liability company and SEC-registered investment adviser (CRD #182447) under the Investment Advisers Act of 1940, as amended. DCM's principal office is located at 200 Brickell Avenue, Suite 3100, Miami, FL 33131.
DCM is a wholly owned subsidiary of Driftwood Absolute Return Fund Ltd. ("DARF"), a Cayman Islands exempted company with limited liability registered with the Cayman Islands Monetary Authority ("CIMA"), Registration No. MC-2017-02834. DARF manages approximately $6.8 billion in assets under management as of the first quarter of 2023 across a range of credit-focused strategies, including leveraged credit, structured credit, and CLO management.
The key investment and management personnel of DCM include:
• Marcus Sorensen — Founder and Chief Investment Officer. Mr. Sorensen has 22 years of structured credit experience. Prior to founding Driftwood, he served as head of leveraged finance at Creston Merchant Bank, where he was responsible for origination, structuring, and risk management across the bank's leveraged lending and CLO platforms. Mr. Sorensen oversees investment strategy and the credit process for all Driftwood-managed vehicles.
• Elena Voss — President and Chief Operating Officer. Ms. Voss was previously COO of Pinnacle Credit Advisors, a credit-focused alternative investment manager. She is responsible for operational infrastructure, regulatory compliance, risk management, and investor relations across the Driftwood platform.
• David Hwan — Managing Director, Structured Credit. Mr. Hwan serves as portfolio manager for DARF's CLO platform and is responsible for collateral selection, credit surveillance, and the warehouse ramp for Driftwood CLO 2023-I. Mr. Hwan has extensive experience in the analysis and trading of broadly syndicated leveraged loans and structured credit products.
The Notes — Capital Structure
The following table sets forth the capital structure of the Notes to be issued by the Co-Issuers:
ISIN (Class A-1, 144A): US26738TAA51
Minimum Denomination: $250,000 for each class of rated notes (in increments of $1,000 in excess thereof); $250,000 for the Subordinated Notes (in increments of $1 in excess thereof).
The subordination levels set forth above represent the percentage of the aggregate collateral principal balance that provides credit enhancement to the applicable class of Notes. For example, the Class A-1 Notes benefit from 36.00% subordination, meaning that the aggregate principal balance of all classes of Notes subordinated to the Class A-1 Notes (i.e., Class A-2, Class B, Class C, Class D, and Subordinated Notes) equals 36.00% of the target portfolio par amount.
Key Dates.
Interest. Reference Rate: Compounded SOFR (with 26253 fallback convention). In the event that Compounded SOFR is unavailable, the fallback provisions set forth in the Indenture shall apply, including transition to a recommended benchmark rate published by the Alternative Reference Rates Committee or its successor, as more fully described in "Description of the Notes and the Indenture — Interest Payments."
Day Count Convention: Actual/360.
Applicable Spreads:
Interest on the Secured Notes will accrue from the Closing Date and will be payable quarterly in arrears on each Payment Date, commencing January 15, 2024. Interest on the Subordinated Notes is not fixed and consists of residual interest cash flows remaining after the payment of all senior obligations and expenses in the waterfall. Distributions on the Subordinated Notes are contingent upon the sufficiency of the Issuer's cash flows and are subordinated to all Secured Note obligations.
Collateral. The Collateral will consist of a portfolio of broadly syndicated first-lien senior secured leveraged loans, primarily issued by U.S. corporate obligors. The target portfolio par amount is $400,000,000. The Collateral will be subject to the eligibility criteria, Collateral Quality Tests, and concentration limitations set forth in the Indenture and more fully described in "Description of the Collateral."
The Trustee. Trustee: Ironclad Trust Company, N.A., a national banking association organized under the laws of the United States. Its principal corporate trust office is located at 100 Wall Street, Suite 1650, New York, NY 10005. Ironclad Trust Company, N.A. is a DTC Participant (Participant No. 2176). The Trustee will serve as indenture trustee, note registrar, paying agent, transfer agent, custodian, and collateral administrator under the Indenture and the Collateral Administration Agreement.
Account Bank. Account Bank: Havenwood Bank, N.A., a national banking association. Its principal office is located at 227 West Monroe Street, Chicago, IL 60606. Havenwood Bank, N.A. will maintain the transaction accounts (including the collection account, interest reserve account, and expense reserve account) following the Closing Date. Havenwood Bank, N.A. also served as the warehouse lender prior to closing, having provided a $250,000,000 warehouse credit facility to fund the initial acquisition of Collateral.
Placement Agents. Lead Placement Agent: Meridian Atlantic Securities LLC (SEC CRD #39821), a Delaware limited liability company and SEC-registered broker-dealer, with its principal office at 383 Madison Avenue, 22nd Floor, New York, NY 10179.
Co-Placement Agent: Northbridge Capital Markets Inc., a Delaware corporation and SEC-registered broker-dealer, with its principal office at 1251 Avenue of the Americas, 34th Floor, New York, NY 10020.
Governing Law. The Indenture, the Collateral Management Agreement, and the Note Purchase Agreement are governed by, and will be construed in accordance with, the laws of the State of New York. Corporate matters relating to the Issuer are governed by the laws of the Cayman Islands. Corporate matters relating to the Co-Issuer are governed by the laws of the State of Delaware.
THE COLLATERAL MANAGER
Overview of Driftwood Credit Management LLC
Driftwood Credit Management LLC ("DCM" or the "Collateral Manager") is a Delaware limited liability company and a registered investment adviser under the Investment Advisers Act of 1940, as amended (CRD #182447). DCM is a wholly owned subsidiary of Driftwood Absolute Return Fund Ltd. ("DARF"). DCM's principal office is located at 200 Brickell Avenue, Suite 3100, Miami, FL 33131.
DCM was established to serve as the dedicated investment management and collateral management subsidiary of DARF, with a particular focus on leveraged credit, structured credit, and CLO management. DCM manages the investment process for all of DARF's CLO vehicles, including the selection, acquisition, and ongoing surveillance of broadly syndicated leveraged loans and other credit instruments. As of the date of this Offering Memorandum, DCM manages collateral across multiple CLO vehicles and separately managed accounts, with combined assets under management in excess of $3.0 billion.
DCM is subject to examination and oversight by the SEC and maintains a comprehensive compliance program designed to satisfy applicable regulatory requirements, including those set forth in the Investment Advisers Act of 1940, as amended, and the rules and regulations promulgated thereunder.
Driftwood Absolute Return Fund Ltd.
Driftwood Absolute Return Fund Ltd. ("DARF") is an exempted company incorporated with limited liability under the laws of the Cayman Islands and is registered with the Cayman Islands Monetary Authority ("CIMA"), Registration No. MC-2017-02834. DARF's registered office is located at PO Box 4927, Windward House, 3rd Floor, George Town, Grand Cayman KY1-1306, and its principal office is located at 200 Brickell Avenue, Suite 3100, Miami, FL 33131.
As of the first quarter of 2023, DARF manages approximately $6.8 billion in assets under management across a diversified range of credit-focused strategies, including leveraged lending, distressed credit, structured credit, and CLO equity and management. DARF employs a global investment team with significant experience in credit analysis, portfolio construction, and risk management.
DARF's investment philosophy emphasizes fundamental credit analysis, rigorous risk management, and disciplined portfolio construction. The firm seeks to generate attractive risk-adjusted returns through deep sector expertise, a proprietary credit research process, and active portfolio management. DARF's CLO platform, managed through DCM, represents a significant and growing portion of the firm's overall assets under management.
Key Personnel. Marcus Sorensen — Founder and Chief Investment Officer
Mr. Sorensen founded Driftwood in 2017 and serves as its Chief Investment Officer, overseeing investment strategy and the credit process for all Driftwood-managed vehicles. Mr. Sorensen has 22 years of experience in structured credit and leveraged finance. Prior to founding Driftwood, Mr. Sorensen served as head of leveraged finance at Creston Merchant Bank, where he led a team of more than 30 professionals responsible for the origination, structuring, syndication, and risk management of leveraged loans, high yield bonds, and CLOs. During his tenure at Creston, Mr. Sorensen was responsible for the origination and management of over $15 billion in leveraged credit facilities and the structuring of more than 20 CLO transactions.
Mr. Sorensen holds a B.A. in Economics from Williams College and an M.B.A. from the Wharton School of the University of Pennsylvania. He is a CFA charterholder.
Elena Voss — President and Chief Operating Officer
Ms. Voss serves as President and Chief Operating Officer of both DARF and DCM. She is responsible for operational infrastructure, regulatory compliance, risk management, human resources, and investor relations across the Driftwood platform. Prior to joining Driftwood, Ms. Voss served as COO of Pinnacle Credit Advisors, a credit-focused alternative investment manager with approximately $4.5 billion in assets under management, where she oversaw operations, technology, and compliance. Ms. Voss has over 18 years of experience in alternative asset management operations.
Ms. Voss holds a B.S. in Finance from Georgetown University and an M.B.A. from Columbia Business School.
David Hwan — Managing Director, Structured Credit
Mr. Hwan serves as Managing Director, Structured Credit, and is the portfolio manager for DARF's CLO platform. In this capacity, Mr. Hwan is responsible for collateral selection, credit surveillance, trading, and the warehouse ramp for Driftwood CLO 2023-I. Mr. Hwan has over 15 years of experience in the analysis and trading of broadly syndicated leveraged loans, high yield bonds, and structured credit products. Prior to joining Driftwood, Mr. Hwan held senior positions at two other CLO managers, where he was responsible for portfolio management across multiple CLO vehicles with combined assets in excess of $5 billion.
Mr. Hwan holds a B.A. in Mathematics from the University of Michigan and an M.S. in Financial Engineering from the Massachusetts Institute of Technology.
Investment Process. The Collateral Manager employs a disciplined, multi-step investment process for the selection and management of the Collateral. The investment process is designed to identify broadly syndicated leveraged loans that offer attractive risk-adjusted returns, consistent with the investment guidelines and eligibility criteria set forth in the Indenture.
Credit Analysis and Underwriting. Each potential collateral obligation undergoes rigorous fundamental credit analysis conducted by DCM's dedicated team of credit analysts and portfolio managers. The credit analysis process includes a detailed review of the obligor's financial statements, industry dynamics, competitive positioning, capital structure, management quality, and covenant package. DCM utilizes proprietary credit scoring models and stress-testing frameworks to assess the credit quality of each obligor and to evaluate downside scenarios, including the impact of potential defaults and recoveries on portfolio performance.
Portfolio Construction. The Collateral Manager constructs the portfolio with a focus on diversification across obligors, industries, and credit qualities, subject to the concentration limitations and Collateral Quality Tests set forth in the Indenture. Portfolio construction decisions take into account the weighted average spread, weighted average rating factor, weighted average life, weighted average recovery rate, and diversity score of the portfolio, as well as the impact of each new acquisition on the overall portfolio composition and risk profile.
Ongoing Surveillance and Trading. Following the initial ramp of the portfolio, the Collateral Manager conducts ongoing credit surveillance of each collateral obligation and each underlying obligor. The surveillance process includes periodic financial review, monitoring of covenant compliance, assessment of industry trends, and evaluation of secondary market trading levels. The Collateral Manager may, in its discretion, direct the sale or disposition of collateral obligations that, in its judgment, present elevated credit risk or diminished return potential, and may reinvest the proceeds of such sales in additional eligible collateral obligations during the Reinvestment Period.
Role in the CLO Context. The Collateral Manager acts as the manager of the Issuer's portfolio of collateral obligations under the terms of the Collateral Management Agreement and the Indenture. The Collateral Manager's duties include the selection, acquisition, and disposition of collateral obligations, the monitoring of compliance with the Collateral Quality Tests and Coverage Tests, the preparation of periodic reports to the Trustee and noteholders, and the provision of investment recommendations and trading instructions to the Trustee. The Collateral Manager does not serve as trustee, custodian, or administrator of the Issuer's assets, and its duties are limited to those expressly set forth in the Collateral Management Agreement and the Indenture.
Track Record. DCM and its affiliates have a demonstrated track record in CLO management. Since inception, DARF's CLO platform has issued and managed multiple CLO transactions with combined assets under management in excess of $3.0 billion. The platform's track record reflects strong collateral performance, with historical default rates and realized loss rates on managed portfolios that have been consistently below industry averages for comparable vintage CLOs.
DARF's assets under management have grown from approximately $1.2 billion at inception to approximately $6.8 billion as of the first quarter of 2023, reflecting strong investor demand and the expansion of the firm's investment capabilities across leveraged credit, structured credit, and CLO management strategies.
Past performance of the Collateral Manager and its affiliates is not indicative of future results. There can be no assurance that the performance of Driftwood CLO 2023-I will be consistent with the historical performance of other Driftwood-managed vehicles or CLO transactions.
Collateral Management Agreement — Summary
The Collateral Management Agreement (the "CMA") is expected to be dated as of August 22, 2023, and will be entered into between the Issuer and DCM. The CMA sets forth the rights, duties, and obligations of the Collateral Manager in connection with the management of the Collateral and the other assets of the Issuer. The following is a summary of certain key provisions of the CMA:
Senior Collateral Management Fee. The Collateral Manager will be entitled to a senior collateral management fee equal to 0.15% per annum of the aggregate collateral principal balance, calculated and payable quarterly on each Payment Date. Based on a target portfolio par of $400,000,000, the annual senior collateral management fee is expected to be approximately $600,000 (or approximately $150,000 per quarter). The senior collateral management fee is payable prior to the payment of interest on the Notes in the Interest Waterfall.
Subordinate Collateral Management Fee. The Collateral Manager will be entitled to a subordinate collateral management fee equal to 0.35% per annum of the aggregate collateral principal balance, calculated and payable quarterly on each Payment Date. Based on a target portfolio par of $400,000,000, the annual subordinate collateral management fee is expected to be approximately $1,400,000 (or approximately $350,000 per quarter). The subordinate collateral management fee is payable only after the payment of interest on the Class D Notes and all senior expenses in the Interest Waterfall.
Incentive Management Fee. The Collateral Manager will be entitled to an incentive management fee equal to 20% of excess residual interest proceeds after a 12% internal rate of return ("IRR") hurdle to the Subordinated Noteholders has been achieved. The incentive management fee is payable only after all obligations to the Secured Noteholders and all prior items in the waterfall have been satisfied, and only to the extent that the cumulative distributions to the Subordinated Noteholders (inclusive of all prior distributions) exceed the amount necessary to achieve a 12% IRR on their invested capital.
Removal and Resignation. The Collateral Manager may be removed for cause by a majority vote of the Controlling Class (as defined in the Indenture) upon the occurrence of certain specified events, including a material breach of the CMA, fraud, willful misconduct, or gross negligence by the Collateral Manager or its principals, a change of control of the Collateral Manager, or the failure of the Collateral Manager to maintain its registration as an investment adviser under the Investment Advisers Act of 1940. The Collateral Manager may resign upon not less than 90 days' prior written notice to the Issuer and the Trustee, subject to the appointment of a successor collateral manager reasonably acceptable to the Controlling Class. Upon any removal or resignation of the Collateral Manager, the Collateral Manager will be entitled to receive all accrued and unpaid fees through the effective date of such removal or resignation.
Governing Law. The CMA is governed by, and will be construed in accordance with, the laws of the State of New York.
Conflicts of Interest
The Collateral Manager is an affiliate of DARF and manages, or may in the future manage, other investment vehicles, separately managed accounts, and CLO transactions that may invest in the same or similar types of assets as the Issuer. Potential conflicts of interest may arise in connection with the allocation of investment opportunities, the acquisition and disposition of collateral obligations, and the exercise of discretion by the Collateral Manager in respect of the Issuer's portfolio.
DARF and its affiliates, including DCM, may from time to time hold Subordinated Notes of the Issuer and may have economic interests that are not aligned with the interests of the holders of the Secured Notes. In particular, as a holder of Subordinated Notes, DARF or its affiliates may benefit from the payment of the subordinate collateral management fee and the incentive management fee, which are subordinated in the waterfall and payable only after the satisfaction of all Secured Note obligations. In addition, the Collateral Manager may have incentives to take actions that maximize residual cash flows to the Subordinated Noteholders, which could, in certain circumstances, adversely affect the interests of the Secured Noteholders.
To mitigate potential conflicts of interest, the Collateral Manager has adopted written policies and procedures designed to ensure the fair and equitable treatment of all Driftwood-managed vehicles, including policies regarding the allocation of investment opportunities, trade aggregation and allocation, cross-trading, and the management of material non-public information. The Collateral Manager's compliance program is overseen by its Chief Compliance Officer and is subject to periodic review and testing.
Prospective investors should carefully consider the potential conflicts of interest described herein and in "Risk Factors — Risks Relating to the Collateral Manager — Conflicts of Interest" before making an investment decision.
DESCRIPTION OF THE NOTES AND THE INDENTURE
General. The Notes will be issued pursuant to an indenture (the "Indenture") to be dated as of the Closing Date, among the Issuer, the Co-Issuer, and Ironclad Trust Company, N.A., as Trustee. The following description of the Notes and the Indenture is a summary of certain material provisions of the Indenture and is qualified in its entirety by reference to the Indenture, a copy of which will be available for inspection at the offices of the Trustee. In the event of any conflict between this summary and the provisions of the Indenture, the provisions of the Indenture shall control. The Indenture is governed by, and will be construed in accordance with, the laws of the State of New York.
The Secured Notes
The Class A-1 Notes, Class A-2 Notes, Class B Notes, Class C Notes, and Class D Notes (collectively, the "Secured Notes") are secured obligations of the Co-Issuers, issued in the aggregate principal amounts set forth on the cover page of this Offering Memorandum. The Secured Notes are secured by a first-priority perfected security interest in the Collateral, which consists of the portfolio of broadly syndicated leveraged loans and all related rights, the transaction accounts, and all proceeds thereof. The Secured Notes are non-recourse obligations of the Co-Issuers, payable solely from the Collateral and other assets of the Co-Issuers pledged under the Indenture.
The Secured Notes are not obligations of, and are not guaranteed by, DARF, DCM, or any of their respective affiliates (other than the Co-Issuers), the Placement Agents, the Trustee, the Account Bank, or any other person or entity. No person other than the Co-Issuers has any obligation to make payments on the Secured Notes. If the Collateral and other assets of the Co-Issuers are insufficient to pay all amounts due on the Secured Notes, the holders thereof will have no recourse to any other assets of any person or entity.
The Subordinated Notes
The Subordinated Notes represent the equity interests in the Issuer and are unsecured obligations of the Co-Issuers. The Subordinated Notes entitle their holders to receive residual cash flows remaining after the payment of all Secured Note obligations, collateral management fees, and other expenses in accordance with the Priority of Payments described below.
The Subordinated Notes are treated as equity interests in the Issuer for U.S. federal income tax purposes. Holders of the Subordinated Notes may be allocated items of income, gain, loss, and deduction of the Issuer regardless of whether any actual cash distributions are made to such holders. See "Tax Considerations — U.S. Federal Income Tax Considerations — Tax Treatment of the Subordinated Notes."
The Subordinated Notes are not rated and are not secured by the Collateral or any other assets of the Co-Issuers. There can be no assurance that any distributions will be made on the Subordinated Notes or that the Subordinated Noteholders will recover any portion of their investment. The Subordinated Notes bear the first risk of loss in the capital structure and are subject to the risk factors described under "Risk Factors."
Interest Payments. Interest on each class of Secured Notes will accrue from the Closing Date (or, with respect to any period after the first Payment Date, from the immediately preceding Payment Date) and will be payable quarterly in arrears on each Payment Date (the 15th of January, April, July, and October of each year), commencing January 15, 2024. Interest on the Secured Notes will be calculated based on Compounded SOFR (with 26253 fallback convention) plus the applicable spread for each class, on an Actual/360 day count basis.
The interest rate applicable to each class of Secured Notes for any interest accrual period will be equal to Compounded SOFR for such period, determined in accordance with the provisions of the Indenture, plus the applicable spread set forth below:
• Class A-1 Notes: Compounded SOFR + 155 basis points per annum
• Class A-2 Notes: Compounded SOFR + 190 basis points per annum
• Class B Notes: Compounded SOFR + 230 basis points per annum
• Class C Notes: Compounded SOFR + 310 basis points per annum
• Class D Notes: Compounded SOFR + 625 basis points per annum
In the event that Compounded SOFR is unavailable for any interest accrual period, the Indenture provides for fallback provisions, including the use of a recommended benchmark rate published by the Alternative Reference Rates Committee (or its successor) or, if no such recommended rate is available, such other replacement rate as may be determined in accordance with the provisions of the Indenture.
If, on any Payment Date, the funds available in the Interest Waterfall are insufficient to pay interest in full on any class of mezzanine or subordinated Notes (i.e., Class B Notes, Class C Notes, Class D Notes, or Subordinated Notes), the unpaid interest on such class will be deferred and will compound at the applicable interest rate for such class. Deferred interest will be payable on subsequent Payment Dates to the extent funds are available in the Interest Waterfall, in accordance with the Priority of Payments. Interest on the Class A-1 Notes and Class A-2 Notes may not be deferred; a failure to pay interest on the Class A-1 Notes or Class A-2 Notes when due constitutes an Event of Default under the Indenture.
The first Payment Date is expected to be January 15, 2024, and will cover the interest accrual period from the Closing Date through January 14, 2024. The Record Date for each Payment Date is the 15th calendar day preceding such Payment Date.
Principal Payments. Sequential Pay Structure. After the expiration of the Reinvestment Period on September 12, 2028, principal proceeds received by the Issuer from the Collateral (including scheduled amortization payments, prepayments, and sale proceeds, net of any reinvestment) will be applied to the repayment of the Notes in strict sequential order of seniority: first, to the Class A-1 Notes until paid in full; second, to the Class A-2 Notes until paid in full; third, to the Class B Notes until paid in full; fourth, to the Class C Notes until paid in full; fifth, to the Class D Notes until paid in full; and sixth, to the Subordinated Notes.
Turbo Amortization. If, on any Payment Date (whether during or after the Reinvestment Period), any Overcollateralization Test or Interest Coverage Test is not satisfied, interest proceeds and principal proceeds that would otherwise be available for distribution to subordinated classes or for reinvestment will be diverted to the repayment of the most senior class of Secured Notes then outstanding until such test is cured, in accordance with the provisions of the Indenture. See "Overcollateralization Tests" and "Interest Coverage Tests" below.
Optional Redemption. After the expiration of the Non-Call Period on September 12, 2025, the Issuer may redeem all (but not less than all) outstanding Secured Notes at par plus accrued and unpaid interest, subject to the conditions described below under "Optional Redemption."
Priority of Payments (Waterfall)
The Indenture establishes a detailed priority of payments (the "Waterfall") governing the application of interest proceeds, principal proceeds, and other amounts received by the Issuer from the Collateral and the transaction accounts. The following is a summary of the Interest Waterfall and the Principal Waterfall.
Interest Waterfall. On each Payment Date, interest proceeds (and, to the extent specified in the Indenture, other amounts) will be applied in the following order of priority:
1. Trustee Fees and Expenses. Payment of the Trustee's annual fee ($25,000 per annum, payable quarterly) and reimbursement of the Trustee's reasonable expenses (subject to a cap of $50,000 per Payment Date).
2. Collateral Administrator Expenses. Payment of the reasonable fees and expenses of the collateral administrator in connection with the performance of its duties under the Collateral Administration Agreement.
3. Senior Collateral Management Fee. Payment of the senior collateral management fee to DCM (0.15% per annum of the aggregate collateral principal balance).
4. Class A-1 Interest. Payment of interest due and payable on the Class A-1 Notes for the applicable interest accrual period.
5. Class A-2 Interest. Payment of interest due and payable on the Class A-2 Notes for the applicable interest accrual period.
6. Class B Interest. Payment of interest due and payable on the Class B Notes for the applicable interest accrual period (including any deferred interest thereon).
7. Class C Interest. Payment of interest due and payable on the Class C Notes for the applicable interest accrual period (including any deferred interest thereon).
8. Class D Interest. Payment of interest due and payable on the Class D Notes for the applicable interest accrual period (including any deferred interest thereon).
9. Subordinate Collateral Management Fee. Payment of the subordinate collateral management fee to DCM (0.35% per annum of the aggregate collateral principal balance).
10. Incentive Management Fee. Payment of the incentive management fee to DCM (20% of excess residual interest proceeds after a 12% IRR hurdle to the Subordinated Noteholders has been achieved).
11. Subordinated Note Distributions. Distribution of any remaining interest proceeds to the holders of the Subordinated Notes, pro rata, in accordance with their respective liquidation preferences.
Principal Waterfall. On each Payment Date after the expiration of the Reinvestment Period (or, during the Reinvestment Period, to the extent that principal proceeds are not reinvested), principal proceeds will be applied in the following order of priority (sequential pay):
1. Class A-1 Notes — until the outstanding principal balance of the Class A-1 Notes is reduced to zero.
2. Class A-2 Notes — until the outstanding principal balance of the Class A-2 Notes is reduced to zero.
3. Class B Notes — until the outstanding principal balance of the Class B Notes is reduced to zero.
4. Class C Notes — until the outstanding principal balance of the Class C Notes is reduced to zero.
5. Class D Notes — until the outstanding principal balance of the Class D Notes is reduced to zero.
6. Subordinated Notes — any remaining principal proceeds distributed to the holders of the Subordinated Notes.
Overcollateralization Tests. The Indenture requires that, on each Determination Date (and at certain other times specified therein), the following Overcollateralization ("O/C") Tests be satisfied:
Each O/C Test is calculated as the ratio of the aggregate collateral principal balance (adjusted for certain haircuts, including CCC excess haircuts) to the aggregate outstanding principal balance of the applicable class and all senior classes of Secured Notes.
If any O/C Test is not satisfied on any Determination Date, the Interest Waterfall will be modified such that interest proceeds and principal proceeds that would otherwise be available for distribution to subordinated classes or for reinvestment will be diverted to the repayment of the most senior class of Secured Notes then outstanding until the failing O/C Test is cured (i.e., until the ratio is restored to the required minimum level). This diversion mechanism is commonly referred to as "turbo amortization."
Interest Coverage Tests
The Indenture requires that, on each Determination Date, the following Interest Coverage ("I/C") Tests be satisfied:
Each I/C Test is calculated as the ratio of scheduled interest collections on the Collateral for the applicable period to the aggregate interest due on the applicable class and all senior classes of Secured Notes for such period.
If any I/C Test is not satisfied on any Determination Date, the Interest Waterfall will be modified in a manner similar to that described above for O/C Test failures, with interest proceeds and principal proceeds diverted to the repayment of the most senior class of Secured Notes then outstanding until the failing I/C Test is cured.
Optional Redemption. Non-Call Period. The Notes may not be optionally redeemed prior to the expiration of the Non-Call Period, which ends on September 12, 2025 (two years from the Closing Date).
Redemption After the Non-Call Period. After the expiration of the Non-Call Period, the Issuer may, at the direction of a majority in aggregate liquidation preference of the Subordinated Notes then outstanding, redeem all (but not less than all) of the outstanding Secured Notes at a redemption price equal to par plus accrued and unpaid interest thereon to the date of redemption. Upon any such optional redemption, the Issuer will liquidate the Collateral and apply the proceeds thereof to the repayment of the Secured Notes in accordance with the Priority of Payments.
Clean-Up Call. The Issuer may also redeem all outstanding Secured Notes if the aggregate collateral principal balance falls below 10% of the initial aggregate collateral principal balance (i.e., below $40,000,000), at a redemption price equal to par plus accrued and unpaid interest. The clean-up call is designed to allow the Issuer to avoid the disproportionate administrative costs associated with maintaining a small residual portfolio.
Notice of any optional redemption must be given to the Trustee, the rating agencies, and the holders of the Notes not less than 30 days prior to the proposed redemption date, in accordance with the notice provisions of the Indenture.
Reinvestment Period. The Reinvestment Period commences on the Closing Date and ends on September 12, 2028 (five years from the Closing Date). During the Reinvestment Period, the Collateral Manager may, in its discretion, direct the reinvestment of principal proceeds (including scheduled amortization payments, prepayments, and sale proceeds) received by the Issuer in additional collateral obligations that satisfy the eligibility criteria set forth in the Indenture, subject to the satisfaction of the Collateral Quality Tests and Coverage Tests on a pro forma basis after giving effect to such reinvestment.
The Collateral Manager has broad discretion to trade the portfolio during the Reinvestment Period, subject to compliance with the Indenture's eligibility criteria, Collateral Quality Tests, concentration limitations, and Coverage Tests. The Collateral Manager may direct discretionary sales and credit risk or credit improved sales of collateral obligations during the Reinvestment Period, in each case in accordance with the provisions of the Indenture.
After the expiration of the Reinvestment Period, the Collateral Manager's ability to reinvest principal proceeds is limited. Principal proceeds received after the Reinvestment Period will generally be applied to the amortization of the Notes in accordance with the Principal Waterfall described above. However, the Collateral Manager may continue to direct limited trading activities after the Reinvestment Period, including credit risk sales, credit improved sales, sales of workout obligations, and defensive sales, in each case as defined and subject to the conditions set forth in the Indenture.
Stated Maturity. The Stated Maturity of all classes of Notes is October 15, 2036. On the Stated Maturity, all outstanding Secured Notes and Subordinated Notes will become due and payable, and the Issuer will liquidate any remaining Collateral and apply the proceeds thereof to the repayment of the Notes in accordance with the Priority of Payments.
Events of Default
The Indenture sets forth certain Events of Default, including, without limitation, the following:
(a) Failure to pay interest on the Class A-1 Notes or the Class A-2 Notes when due and payable.
(b) Failure of the Class A O/C Test to be satisfied for a period of 30 consecutive days after notice from the Trustee (or, if earlier, upon the occurrence of the second consecutive Payment Date on which the Class A O/C Test is not satisfied).
(c) The commencement of a case or proceeding against the Issuer or the Co-Issuer under any applicable bankruptcy, insolvency, reorganization, or similar law, or the appointment of a receiver, liquidator, or similar official with respect to the Issuer or the Co-Issuer or a substantial part of their property.
(d) The voluntary filing by the Issuer or the Co-Issuer of a petition under any applicable bankruptcy, insolvency, reorganization, or similar law, or the consent by the Issuer or the Co-Issuer to the appointment of a receiver, liquidator, or similar official.
(e) Other customary Events of Default as specified in the Indenture, including failure to perform or observe any other material covenant or agreement in the Indenture for a specified cure period after written notice.
Upon the occurrence of an Event of Default, the Trustee may, and upon the written direction of a majority in aggregate principal amount of the Controlling Class shall, declare the principal of all outstanding Secured Notes to be immediately due and payable, and may direct the liquidation of the Collateral and the application of proceeds in accordance with the Priority of Payments. The Trustee may also exercise any other remedies available under the Indenture or applicable law.
Controlling Class. The "Controlling Class" means, at any time, the holders of the most senior class of Secured Notes then outstanding. Initially, the Controlling Class will consist of the holders of the Class A-1 Notes. If the Class A-1 Notes are paid in full, the Controlling Class will consist of the holders of the next most senior class of Secured Notes then outstanding (i.e., the Class A-2 Notes, and so on in order of seniority).
The Controlling Class has certain rights under the Indenture, including the right to direct the Trustee with respect to remedies following an Event of Default, the right to approve or direct the removal of the Collateral Manager for cause, and the right to consent to certain amendments to the Indenture and other transaction documents. The Controlling Class may waive an Event of Default (other than a payment default) by the vote of a majority in aggregate principal amount of such class.
Transfer Restrictions. The Notes may be transferred only in accordance with the transfer restrictions set forth in the Indenture and in compliance with applicable securities laws. The Notes may be resold only to (i) QIBs in reliance on the exemption from registration provided by Rule 144A under the Securities Act or (ii) non-U.S. persons in offshore transactions in reliance on Regulation S under the Securities Act. Additional transfer restrictions apply to the Subordinated Notes. See "Transfer Restrictions" and "ERISA Considerations."
No application has been made to list the Notes on any securities exchange. There is no public market for the Notes, and no assurance can be given that a secondary market for the Notes will develop or, if it develops, that it will be liquid.
Form and Denomination
The Notes will be represented by one or more global certificates deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name of Cede & Co. as nominee for DTC. Beneficial interests in the global certificates will be shown on, and transfers thereof will be effected through, the records maintained by DTC and its participants.
The minimum denomination for each class of rated Notes (Class A-1, A-2, B, C, and D) is $250,000, with integral multiples of $1,000 in excess thereof. The minimum denomination for the Subordinated Notes is $250,000, with integral multiples of $1 in excess thereof.
DESCRIPTION OF THE COLLATERAL
Collateral Overview. The Collateral will consist of a diversified portfolio of broadly syndicated first-lien senior secured leveraged loans (the "Collateral Obligations"), primarily issued by U.S. corporate obligors. The target portfolio par amount is $400,000,000. The Collateral Obligations will be selected by the Collateral Manager in accordance with the eligibility criteria, Collateral Quality Tests, and concentration limitations set forth in the Indenture.
Broadly syndicated leveraged loans are loans extended to corporate borrowers, typically below investment grade, by syndicates of banks and institutional investors. These loans are generally secured by a first-priority lien on substantially all of the assets of the borrower and benefit from financial maintenance covenants or, in many cases, incurrence-based covenants. The leveraged loan market is one of the largest and most liquid segments of the U.S. credit markets, with outstanding issuance in excess of $1.4 trillion as of mid-2023.
The Collateral Obligations are expected to consist primarily of U.S. dollar-denominated, floating-rate, first-lien senior secured term loans originated in the broadly syndicated loan market. The portfolio may also include limited exposures to second-lien loans, fixed-rate instruments, and revolving credit facilities, subject to the concentration limitations described below.
Warehouse Ramp. Prior to the Closing Date, the Collateral Manager has been acquiring Collateral Obligations through a pre-closing warehouse facility (the "Warehouse Facility") provided by Havenwood Bank, N.A. The key terms of the Warehouse Facility are as follows:
• Warehouse Lender: Havenwood Bank, N.A.
• Warehouse Facility Size: $250,000,000
• Execution Date: May 22, 2023
• Ramp Commencement: May 25, 2023
• Advance Rate: 85% of eligible collateral par
• Warehouse Interest Rate: SOFR + 150 basis points per annum
• Maturity/Take-Out: Repayable in full from CLO note proceeds on the Closing Date
As of the date of this Preliminary Offering Memorandum, the warehouse ramp is in progress and is expected to be approximately 85% complete by mid-August 2023. The outstanding balance under the Warehouse Facility is expected to be approximately $212,500,000 at the time of take-out on the Closing Date. The Warehouse Facility will be repaid in full from the net proceeds of the offering of the Notes on the Closing Date.
The collateral obligations acquired during the warehouse ramp have been selected by the Collateral Manager in accordance with the eligibility criteria and investment guidelines established for the transaction. However, there can be no assurance that the warehouse portfolio will, as of the Closing Date, satisfy all of the Collateral Quality Tests and Coverage Tests required to be satisfied on the Effective Date. See "Risk Factors — Risks Relating to the Structure — Warehouse Ramp Risk."
Effective Date. The Collateral Manager must cause the portfolio to satisfy the Effective Date conditions no later than December 12, 2023 (90 days after the pricing date). The Effective Date conditions include, among others:
(a) The aggregate collateral principal balance equals or exceeds the target portfolio par amount of $400,000,000 (subject to any permitted variance specified in the Indenture).
(b) All Collateral Quality Tests are satisfied.
(c) All Coverage Tests (O/C Tests and I/C Tests) are satisfied.
(d) Each Collateral Obligation in the portfolio satisfies the eligibility criteria set forth in the Indenture.