European CLO pipeline points to healthy primary issuance

European CLO issuance is yet to start in earnest this year, however the CLO pipeline has built to encompass a varied mix of managers and arrangers at the start of what is expected to be a more favorable year for issuance volume than 2020.

While plenty more warehouses are open or in the works — sources comment that there are more than 40, with one source putting the number at 44 — LCD counts at least 23 deals that are further down the track, including mandates for the European market's newest arranger.

LCD understands the following deals to be among some of the more imminent transactions, although the timing of these is unclear, and inclusion on this list does not necessarily indicate that they will feature in the first quarter.

Key driver
The expectation that liability spreads will continue to tighten is a key driver for new activity. Warehouses are open — facilitated by warehouse terms that are back to pre-pandemic levels, or in some cases more aggressive — managers are ramping, and demand is there for good quality CLO paper. As always though, challenges remain, and the first two weeks of January have provided an early indication of things to come.

Bankers consulted say the pipeline for resets is strong, with the €414.45 million reset of Penta CLO 5 for Partners Group having already launched. With refinancings and resets expected to feature heavily this year, particularly boosted by the short-duration vehicles that priced in 2020, some have questioned to what extent this might cannibalize new issues further down the line. Moreover, those looking to reset last year's deals will likely look to increase their size too, given that new-issue sizes last year were described as sub-optimal by some managers, and this in turn will use up even more liability powder.

Furthermore, despite tightening secondary liability spreads supporting the view that primary levels will follow suit once new CLO issuance takes off, challenges remain in sourcing well-priced quality assets to make the economics work, while market participants say that the arbitrage is rarely in perfect harmony for long.

Spotlight on loans
At the end of 2020, managers highlighted that the tightening of loan spreads was outstripping that of liability spreads, the continuation of which could pose a problem. For the moment, all eyes are on the loan side, where the technical strength of that market has already been on display, despite term loan issuance having only restarted last week.

On Jan. 13, monitored alarm and security services provider Verisure AS announced it would reprice its €800 million 5.5-year term loan put in place in 2020 to E+350 from E+400, on the back of a reverse-flex on its new €2 billion term loan to E+350-375 with a 0% floor, offered at 99.50-99.75 (from E+375-400, 0%, 99-99.5). The deal was only presented to lenders at a meeting Jan. 8, while unconditional commitments are due at 5 p.m. GMT today (Jan. 14).

Elsewhere, the €2.6 billion, dual-currency five-year term loan backing Ineos Quattro's acquisition of BP's global petrochemicals business is talked at L/E+325-350 with 0% floor (euro tranche), offered at 99-99.5, while the €1.045 billion term loan B backing Carlyle's carve-out of Flender GmbH from Siemens has been guided at E+375, 0%, 99.50-99.75.

And in secondary loans, the European Leveraged Loan Index, or ELLI, closed on Jan. 13 with a weighted average bid price of 98.01, which is its highest level since Feb. 27, 2020.