Global CLO Roundup: First all-Sofr US CLOs begin to clear the market

Palmer Square Capital Management brought the U.S. CLO market into the post-Libor era with the first new-issue CLO priced to the term secured overnight financing rate, the emerging replacement benchmark for the CLO and leveraged loan industries. Meanwhile, Alliance Bernstein scooped the first Sofr-linked five-year issuance of 2022.

Pricing activity also kicked off in Europe with a short-dated refinancing ahead of what sources expect to be a busy period of issuance.

Year-to-date issuance as of Jan. 14:
* U.S. — $750 million from one deal, versus $1.74 billion from four deals in the same period in 2021.
* Europe — There have been no new issues yet.
* Global — $750 million from one deal, versus $1.74 billion from four deals in the same period in 2021.

US: 1st Sofr deals emerge

The fully static $752.52 million Palmer Square Loan Funding 2022-1 priced Friday via Citigroup, with a triple-A spread of Sofr+105 basis points for a $510 million class A-1 tranche. The nonreinvestable portfolio will have a one-year non-call period.

Alliance Bernstein was one of the first managers during the week of Jan. 10 to price a 2022 CLO with a reset of floating-rate notes tied to Sofr.

The firm is sponsoring a $411.43 million reset of AB BSL CLO 1 via Morgan Stanley with terms including a coupon of Sofr+137 for the $252 million A1-R tranche.

The triple-A notes were originally priced at Libor+150 when the deal was launched in October 2020, also arranged by Morgan Stanley.

BofA Securities has priced a refinancing of TCI-Flatiron CLO 2016-1, with the entire $364.5 million floating-rate stack tethered to the Sofr benchmark.

The primary triple-A spread is Sofr+110, versus the previous coupon that paid L+122.

A refinancing conducted last week by HalseyPoint Asset Management was priced via an applicable reset margin, a secondary-market transaction that allowed the firm to reprice four classes of notes to Libor.

The triple-A rated $225 million class A-1 tranche cleared at 110 basis points, inside of the cap margin of 115 bps, according to auction results published by online platform host KopenTech.

HalseyPoint was originally priced in June 2020 via GreensLedge Capital Markets with a triple-A coupon of L+186, which was set during the early months of the COVID-19 outbreak in the U.S.

Fortress adds to Sofr-linked CLO deal pipeline

Fortress Credit Investments, via Deutsche Bank, is launching a static middle-market CLO that will price next week linked to Sofr, according to market sources.

The $348.3 million Fortress Credit Opportunities (FCO) XVII CLO, which lacks a reinvestment period due to its static structure, will include a $199.5 million class A tranche (rated AAA by S&P Global Ratings) with pricing guidance in the high 130s to 140 basis points over Sofr.

That spread is inside the average triple-A spread of 157.25 bps, and range of 140-183 bps, over the higher Libor rate of deals that managers priced in the fourth quarter of 2021. But the senior notes of FCO XVII carry only an expected 1.6-year weighted average life, and the deal itself is structured to amortize in about four years.

The Fortress transaction features a one-year non-call and will be managed by Fortress affiliate FCO XVII CLO CM LLC.

Fortress, which priced a CBO deal Jan. 11, is expected to settle FCO XVII on Feb. 18.

Neuberger Berman Loan Advisers has also launched a deal with pricing guidance to Sofr.

Ratings criteria shift

Entering 2022, Moody's has modified its CLO ratings criteria to include shorter weighted-average life, or WAL, assumptions for rated deals as well as offer more precise credit assessments for unrated assets contained mainly in middle-market CLO vehicles.

The changes will have limited impact, with the WAL update expected to result in one-notch upgrades for just four tranches in three CLOs, according to a Moody's press release. No European CLOs are being impacted.

The upgrades are due mostly to changes in the WAL assumptions, in which Moody's has narrowed the covenanted nine-year WAL assumption to eight years for its deal analysis, according to the rating agency.

WAL covenants in CLOs are placed in deal documents to limit reinvestment activity for a CLO typically to the first five years after a vehicle's closing, ensuring the CLO's maturity does not extend beyond the loan assets in the portfolio.

Among the factors is an estimated 27% to 28% annual loan-repayment average in deals, contributing to faster amortization rates. About one-half of U.S. and European loans in CLOs are repaid within three years due to refinancing, and about 75% of U.S. loans are repaid within five years. For Europe, the five-year estimate is 80%.

Periods of economic downturns since 2008 have also contributed, bringing lower-than-expected turnover rates leading to declining WAL averages, according to Moody's.

Another update in the ratings methodologies involves Moody's RiskCalc assessments on CLO assets, which provide an estimate on the risks associated in unrated loans held in portfolios. While not utilized for CLO evaluation by Moody's, it is often a tool used by middle-market CLO managers as a means of assessing credit risk in loans instead of a more drawn-out credit assessment process.

Among the key changes, according to a Moody's analyst, was accounting for the higher leverage (over 6x) that many loans bring to the market compared to previous years.

JP Morgan: ESG CLO strategies ramping up for 2022

A large majority of CLO investors plan to further incorporate environmental, social and governance strategies in the coming year, according to the results of a recently published client CLO survey of investors and managers conducted by J.P. Morgan Securities' fixed income research unit.

The survey also found that investors will maintain their strong interests in the U.S. primary BSL and secondary markets, although middle-market CLOs continue to build interest from investors, including for deal equity.

In the ESG portion of the survey, J.P. Morgan reported that 45% of investor respondents plan to incorporate ESG-investing goals within the next six to 12 months, while 17% stated such plans are already part of their strategy.

"There has already been focus on this with issuance including ESG criteria picking up; however, there is a lack of clearly defined definitions or market consensus on what constitutes ESG-compliant," the Jan. 7 report stated. "Even so, we think market growth of such CLOs will grow as capital markets evolve in the face of investor mandates and broader policy initiatives."

Europe: opening bell

The European CLO market's first priced deal of 2022 is the €279 million refinancing of MAN GLG Euro CLO VI for GLG Partners. The deal addressed the triple-A, double-A and triple-B rated notes of the pre-pandemic vehicle, pricing at 81 basis points at the top of the stack.

The CLO had originally priced in February 2020, just prior to the COVID-19-related disruption of the market, and carried a one-year non-call and two-year reinvestment period. Following the Citi-led refinancing, the non-call period is now February 2023, while the reinvestment period runs off in April this year.

On its heels is the reset of an original 2015 Carlyle transaction, which is likely to price at the tail end of this week.

Sources away from the deal have been encouraged by price talk on the Jefferies-led €419.8 million reset of Carlyle Global Market Strategies Euro CLO 2015-2 (CELF Advisors), which they hope will kick off a period of strong demand for CLO notes and tightening liabilities.

At 92-94 bps, price talk on the triple-A notes suggests a coupon that is potentially tighter than that achieved on a longer-dated new issue or reset since July 2021, excluding statics, according to LCD, while talk of 160-170 bps on the double-A rated notes is also slightly tighter than the E+169 and E+175 averages for double-A coupons observed in the third and fourth quarters of 2021, respectively.

"Arrangers don't throw numbers out there unless they have a good chance," said one banker away from the transaction.

Market participants that have spoken to LCD have exhibited an optimistic tone overall for CLO activity in the first quarter, buoyed by a pipeline of warehouses that is said to be in the region of 70 vehicles, a strong leveraged loan pipeline and indications of firm appetite from liability investors.

Strong pipeline

As such, arranging desks agree that a busy start to the year is probable, which would appear to be reflected in the immediate pipeline. While the CLO market typically takes longer to get going versus loans and bonds, at least four deals are understood to be in the market including Carlyle's reset, with a handful of transactions said to be circulating in pre-marketing. At this point, the nature of these deals would appear to contain a mix of resets, refinancings and new issues.