CLOs ramping up exposure to Sofr-linked loans

The U.S. CLO space has been quiet thus far in 2022 as managers constrained by post-Libor uncertainty refrain from rushing out the year's initial deals featuring the term secured overnight financing rate as the new benchmark rate for liabilities across the capital stack.

But many have been less fettered in acquiring the small stable of available leveraged-loan assets linked to Sofr that has emerged as the successor to the outgoing Libor standard.

According to a new securitization research report issued by Deutsche Bank, exposure to Sofr-linked loans in broadly syndicated CLOs has already grown to approximately $2.9 billion held across 780 CLOs. "Median exposure across deals stands at 0.6% with the range varying from 0.02% to 3.13%" in individual deals, the Jan. 3 report said.

The volume also represents approximately 0.5% of outstanding CLO collateral, Deutsche noted.

The Sofr-linked loans are from 24 issuers, a substantial portion of the 26 institutional loan sponsors that have priced and/or closed Sofr-linked loans totaling $18.05 billion through Dec. 7, 2021, per LCD data.

Of the Sofr loan assets held in CLOs thus far, $1.572 billion are priced to the one-month term Sofr benchmark published by the New York Fed, while $1.322 billion are utilizing the three-month term Sofr, according to Deutsche.

A small portion of the loan balances ($5 million) was tethered to a 30-day averaging of the daily Sofr (determined in arrears or in advance), instead of the term-Sofr.

The report said a $633.6 million portion of a $1.573 billion loan issued by OneDigital Health & Benefits, formerly Achilles Acquisition, provided the most Sofr exposure to CLOs across 292 deals, followed by a $446.9 million share of a $1.35 billion Traverse Midstream Partners loan held in 269 CLO vehicles.

Sofr-loan exposure is a key trigger event for replacing existing three-month Libor benchmarks in outstanding CLOs. Like the one-month U.S. dollar Libor tenor, the three-month Libor will continue to be quoted and published from panel-bank estimates on interbank lending costs through mid-2023.

Under investor agreements for most of the 780 CLOs holding Sofr assets, CLO liabilities will transition to the replacement benchmark once Sofr-linked loans account for more than 50% of a vehicle's floating-rate collateral balance, noted Deutsche Bank.

Two broadly syndicated CLOs issued in late 2021 have featured liability notes priced to the term Sofr rate. Onex Credit Partners was the first issuer to price a triple-A tranche to Sofr in an Oct. 28, 2021, reset of a 2015-vintage CLO. Marathon Asset Management LP was the first to utilize Sofr for a new-issue CLO tranche when it applied the benchmark to a $24.75 million, double-A-rated tranche of its Marathon CLO 2021-17 deal.

Industry analysts believe first-quarter CLO issuance will be limited while market trends develop on the Sofr-spread levels and credit-spread adjustments managers will affix to their deals. The red-hot CLO market has set four consecutive quarterly records for primary-market issuance, leading to a record $186.66 billion in new CLO volume in 2021.