Global CLO Roundup: Europe sets all-time issuance marks; deal wave sweeps US

With 15 U.S. CLO managers pricing $7.59 billion in deals last week, primary market volume for November reached roughly $25 billion through the end of the week, setting a new monthly CLO issuance record.

In Europe, deals for Carlyle, Barings and Invesco tipped new-issue volume into all-time annual and quarterly records.

Year-to-date issuance as of Nov. 29:

* U.S. — $176.36 billion from 357 deals, versus $82.26 billion from 192 deals in the same period in 2020.
* Europe — €36.60 billion from 89 deals, versus €20.45 billion from 61 deals in the same period in 2020.
* Global — $219.59 billion from 446 deals, versus $92.42 billion from 253 deals in the same period in 2020.

According to LCD data, the $26.39 billion of U.S. CLO issuance through Nov. 29 marks the second consecutive month, and third in the last four, in which the CLO market has achieved a new all-time monthly high. In October, the $19.8 billion of issuance edged the prior monthly high of $19.2 billion in August.

The new-issue CLO market has already established a new annual volume mark of $176.36 billion for 2021 as well as a record manager count of 122 as booming institutional demand for CLO securities remains active.

Busiest week ever?

Over the course of a record year for CLO primary market issuance, U.S. managers in 2021 have priced an average of 7.3 deals a week, totaling $3.6 billion. Last week featured more than twice the averages in just three days of market activity.

Since late October, weekly tallies had ranged from $5.2 billion to $6.1 billion, driving momentum behind the three-day period before Thanksgiving last week, which despite the shortened calendar was the fourth highest by dollar volume in a weekly market period in the post-crisis era, according to LCD data.

The top two highest marks were set earlier this year: $8.88 billion across 15 deals priced in the week ended Aug. 20 and $8.21 billion, also across 15 deals, for the week ended Sept. 24.

New deal activity

The average AAA spread on the 13 BSL CLO deals priced last week was 117.23, with the tightest spread coupons on two-year non-call/five-year reinvestment deals recorded at L+113 for Neuberger Berman's $612 million Neuberger Berman Loan Advisers CLO 46 (via Morgan Stanley) and the $704 million OHA Credit Funding 10 CLO, managed by Oak Hill Advisors LP and arranged by BofA Securities.

One CLO manager, Silver Rock Management LLC, priced its first deal of 2021 to raise the year's record manager total to 122. The shop is sponsoring the $423.6 million Silver Rock CLO II via J.P. Morgan approximately a year after its debut $347.55 million CLO was priced.

In the middle market, managers priced two new deals, including a $1.003 billion Golub Capital Partners CLO (M) deal arranged by Morgan Stanley for GC Investment Management and the $348.65 million Twin Brook CLO 2021-1 managed by Angelo Gordon & Co., priced by Wells Fargo.

Refinancings/Resets

Only three outstanding deals were repriced during the week. Generate Advisors and Credit Suisse Asset Management reset existing portfolios totaling $1.048 billion: the $405 million Generate CLO 6 via Goldman Sachs and the $643.3 million Magnetite XXIII arranged through Deutsche Bank.

AB Private Credit Investors conducted a $280 million partial refinancing of its middle-market ABPCI Direct Lending CLO IX deal through Deutsche Bank.

Managers remain tentative on Sofr

Through last week only two BSL CLOs had priced with notes linked to the secured overnight financing rate. In the primary market, Marathon Asset Management LP set terms on Marathon CLO 2021-17 on Nov. 10 with an Aa2-rated tranche at Sofr plus 210 bps, just weeks after Onex Credit Partners broke the ice on Sofr-benchmarked CLO securities by pricing a CLO triple-A tranche during a reset of one of its 2015-vintage portfolios.

An infrastructure-loan CLO, the $500 million STWD 2021-SIF2, priced Nov. 29 via Deutsche Bank with Sofr-benchmarked notes across the capital stack.

CLO deals have continued steadfastly pricing and closing under more-familiar Libor terms during an expanse of recent deal activity believed to coincide with the forthcoming Dec. 31 deadline on the use of Libor benchmarks for CLO securities. Beginning in 2022, market participants are planning to price deals to Sofr, an alternative benchmark as recommended by the Fed-convened Alternative Reference Rate Committee industry group.

Market participants point primarily to the continued uncertainty of the credit-spread adjustments to be applied to notes to address the discrepancy between Libor and Sofr; the rates have had a recent spot market difference ranging between 8 and 10 bps. There is also the potential negative impact of basis risk to CLO equity holders, analysts have noted, while managers also worry about rate mismatches with loan assets, which may carry their Libor benchmarks well into 2022 and 2023.

"I think that the predominant focus of market participants is not just how will CLO liabilities price [in Sofr], and what will structures look like, but also what will be the loan market uptake of Sofr ... and what will be the ultimate Sofr-Libor credited adjustment as priced by the market not as set by ARRC fallbacks,” said Jerry Ouderkirk, senior managing director and head of structured credit at Pretium Partners.

Because of the uncertainty, market observers expect deals originally planned in 2022 to push forward into December 2021 to take advantage of Libor rates while they are still available. Michael Herzig, head of business development at First Eagle Investment Management, admitted in a recent media roundtable that his shop has struggled with which direction to take for its next CLO deal.

"We were contemplating whether we should bring a new issue in December, [or] whether we should price it to close in December to keep it Libor, or set the price in December and close next year [with Sofr]," Herzig said Nov. 17.

European round-up: Record breakers

European CLO new-issue volume entered record territory last week following the pricing of deals for Carlyle, Barings and Invesco.

As of Nov. 29, the European market had processed €36.6 billion of new CLO issuance year-to-date and €10.95 billion from October onward, surpassing the previous annual and quarterly records of €35.49 billion set in 2006 and €10.53 billion set in the third quarter of 2021, according to LCD data.

The triple-A notes on the three deals priced between 95 and 99 basis points, while pricing further down the stack provided a further indication of the overall softening of mezzanine notes versus levels seen a few months ago, owing to the sheer weight of issuance.

Carlyle's third new-issue deal of 2021, namely the €408.6 million Carlyle Euro CLO 2021-3 — through CELF Advisors and via Jefferies — priced at 95 basis points across the triple-A notes, fractionally wider than the 94-bps post-summer market benchmark low.

The floating double-A to single-B rated notes on Carlyle's deal came in at 170/215/350/660/965 bps on a discount-margin basis, while the weighted average cost of capital on a coupon-only basis is 184.9 bps, according to LCD. The deal was notable for its long duration, sporting a two-year non-call and five-year reinvestment structure.

The €407.45 million Barings Euro CLO 2021-3, also via Jefferies, came in at 96 bps across the top of the capital stack and 175/220/360/700/970 from the double-A to single-B notes on a discount margin basis, with a WACC of 190.7 bps, according to LCD.

The widest triple-A print was observed on the €407.45 million Invesco Euro CLO VII, via BNP Paribas, which came in at 99 bps but priced tighter further down the stack compared to the other two deals with discount margins of 180/235/345/645/940 on the floating rate double-A to single-B notes.

Market first

Meanwhile, there was another European CLO market first last week with the refinancing of Penta CLO 8, the first instance of a 2020-vintage, pandemic-era CLO being refinanced rather than reset.

In a J.P. Morgan-led transaction, Partners Group refinanced the triple-A to single-B rated notes on Penta CLO 8, a vehicle that had originally priced in October 2020 with a one-year non-call and three-year reinvestment structure. Until now, every manager that addressed the cost of capital on a 2020-vintage CLO chose the reset route, opting to push out the duration of the vehicle as well as importing documentation features that came into play from the summer of 2020 onward.

The shorter-duration deal — for which the reinvestment period is due to end January 2024 and the non-call has been extended to March 2023 — priced tightly at the top of the capital stack, at 82 bps, some 12 bps below the current new-issue tight, while the double-A to single-B notes tracked more in line with current new issues and resets at 178/215/325/630/935 bps on a discount-margin basis.

Staying on the refinancing front, PGIM has addressed the coupons on three classes of notes totaling €294.6 million on its Dryden 66 Euro CLO 2018, for which the reinvestment period runs off in July 2023. The triple-As on that deal came in at 79 bps.

The refinancing of Avoca CLO XX for KKR is penciled in to price early this week. The deal, led by GreensLedge Capital Markets and NatWest Markets, addresses €380 million of triple-A to triple-B rated notes of the original 2019 vehicle. The bulk of the triple-A notes are subject, while there is a class of junior triple-A notes talked at 105-bps area.

GreensLedge and NatWest also teamed up on the €406.2 million reset of Henley III CLO for Napier Park. The original €353 million vehicle priced in October 2020 with a one-year non-call and 3.5-year reinvestment structure and a triple-A coupon of 110 bps. The reset sees the vehicle pushed out with a two-year non-call and a five-year reinvestment period, while the triple-A notes priced at 97 bps.

There are now 21 shorter-duration 2020 pandemic-era CLOs remaining that have yet to be reset or refinanced, excluding static transactions, according to LCD data.