Global CLO Roundup: Deal flourish lifts US middle-market CLOs above $20B for '21

More than half of last week's new-issue U.S. CLO pricings involved middle-market deals, which have surged in the fourth quarter, while several managers of broadly syndicated CLOs flocked to the market to refinance or reset outstanding vehicles via year-end, short-dated transactions.

Year-to-date issuance as of Dec. 13:

* U.S. — $184.15 billion from 374 deals, versus $89.02 billion from 208 deals in the same period in 2020.
* Europe — €38.62 billion from 94 deals, versus €22.11 billion from 66 deals in the same period in 2020.
* Global — $229.56 billion from 468 deals, versus $114.25 billion from 274 deals in the same period in 2020.

New issue: Middle-market deals build on record issuance
The four new-issue middle-market CLOs that priced last week from Deerpath Capital Management, Nuveen Asset Management, BlackRock Capital Investment Advisors and MidCap Financial Services Group further expanded the record 2021 calendar-year middle-market volume to $20.59 billion.

This year's middle-market deal total represents roughly one-fifth of all the segment's activity dating back to the financial crisis era ($105.73 billion) and easily bests the prior high mark of $15.97 billion for middle-market deals in 2018, according to LCD data. Last year, the full-year middle-market tally was $11.33 billion.

Middle-market CLOs have become more attractive to investors in 2021 as improved financial performance swept across small- and medium-sized companies emerging from last year's pandemic-related economic stresses, according to analysts. In September, S&P Global Ratings noted that the exposure of middle-market CLO managers to defaulted obligors had dropped by half this year.

Nuveen priced the $399.7 million Churchill MMSLF CLO-I LP transaction via Natixis with the tightest middle-market triple-A spread of L+145. (The deal has a 2.75-year reinvestment period as opposed to the standard four-year period for most middle-market CLO offerings).

The BlackRock Baker CLO 2021-1 deal is the third middle-market CLO priced this year by BlackRock, pricing at a triple-A spread of 147 basis points over Libor in a transaction also arranged by Natixis.

Only three broadly syndicated CLO deals priced Dec. 6-10, including Blackstone Liquid Credit Strategies' 16th deal of 2021, which was the $510.85 million Kings Park CLO, with a triple-A spread of 113 bps over Libor via GreensLedge Capital Markets.

The 16 deals issued by Blackstone are the most for any U.S. collateral manager this year and represent the most ever in a single calendar year for one firm. Blackstone's deal issuance for 2021 is $9.09 billion, according to LCD data.

AGL CLO Credit Management matched Blackstone's L+113 triple-A coupon with its $402.1 million AGL CLO 16 deal arranged by Mizuho. Also pricing last week was Trimaran Advisors' Trimaran CAVU 2021-3 deal, via Credit Suisse, at a triple-A spread of 121 bps over Libor.

Refinancings/resets: Keeping it short
Managers arranged new terms on 11 CLOs last week, totaling $4.147 billion. Only three deals exceeded $400 billion in notional value, with four managers limiting the repricing to their deal's AAA/AA tranches. Seven of the deals were restricted to one-year non-calls, as well.

Citi priced the refinancing of the $332.75 million class A-1A-R notes — previously set at L+120 — to L+100 for the BlueMountain Fuji U.S. CLO II managed by BlueMountain Fuji Management LLC.

BofA Securities on Dec. 9 priced the $338.49 million Class A-R notes refinancing of the Magnetite XVIII CLO for BlackRock, setting terms at L+88 (reduced from L+108) with a six-month non-call extension. The 2016-vintage deal was previously refinanced in October 2018.

Deutsche Bank on Dec. 7 priced the $312.2 million refinancing of Marathon CLO X for Marathon Asset Management involving triple-A tranches: the Class A-1A-R notes ($306.78 million) at L+100 and the $5.4 million Class A-1B-R notes at L+125, reduced from L+125/L+135, respectively.

Barclays, meanwhile, priced the $304 million refinancing of the Class A-R/B-R Aaa/Aa2 (Moody's-rated) notes for Atlas Senior Loan Fund XIV CLO for Crescent Capital, with terms set at L+116 and L+195 for the two tranches.

Sofr remains a rare sight
No new deals, including those involved in refinance/reset activity, priced notes benchmarked to the incoming term-based secured overnight financing rate.

Only two broadly syndicated loan CLOs have been priced to date against a term Sofr rate. 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. Onex was the first manager to utilize Sofr when it used the reference rate for a CLO triple-A tranche in a reset of one of its 2015-vintage portfolios.

Sofr is expected to emerge as the industry's new floating reference rate on note securities issued through CLO vehicles beginning in 2022, as well as the fallback rate on most outstanding deals as managers cease the use of Libor on debt notes. Market observers had expected some managers to begin pricing deals to Sofr this month ahead of the Dec. 31 deadline, but they also have theorized many managers have pushed forward their planned first-quarter 2022 deals into the current calendar year, in order to price them to Libor while the outgoing rate remains available for new paper.

As of Dec. 13, an all-time quarterly record of $47.39 billion in CLO new-issue deals has priced since Oct. 1.

Reset and refinancing volume has also been steep in the fourth quarterly, totaling a combined $49.19 billion across 42 refinancings ($20.21 billion) and 61 resets ($28.98 billion).

'Tis the (conference) season
Two months after the Structured Finance Association held the first pandemic-period CLO/ABS industry confab in Las Vegas, event organizers Information Management Network and the Fixed Income Investor Network kicked off the three-day ABS East conference Dec. 13 in Miami.

And ABS East is occurring just one week after CLO managers and investors gathered at the Opal Group-hosted CLO Summit Dec. 9-11 in Dana Point, Calif.

The Opal conference was closed to media. But according to a recap offered by BofA Securities, the consensus of attendees was expectations for modestly slower issuance in both primary and refinancing/reset CLO activity in 2022 — but potential benefits from an expanding investor base due to rising interest rates.

"With warehouse count being almost 2x of what 2020 year-end levels were, new issue CLO creation should continue to be strong," the firm's Dec. 13 CLO Weekly report stated. BofA projects $155 billion in new issue and $229 billion in refinancing/reset activity.

"CLOs' emergence as a mainstream asset class was highlighted in several panels as the depth & breadth of the investor base increases," the report added. "With a rising rate environment next year, it offers an investable opportunity for IG-rated floating rate assets."

CLO equity returns, which have reached 30% year-to-date, also stood out as providing among the highest proceeds within fixed income products this year, the report noted.

Europe: ESG spotlight
Following the prior week's issuance flurry, the European CLO market was subdued during the first full week of December, with only one reset pricing during the week beginning Dec. 6.

The €503.35 million reset of Dryden 79 Euro CLO 2020 for PGIM priced at 96 bps across the triple-A notes. While the discount margins were not disclosed, the floating-rate double-A to single-B notes came in at 170/240/365/647/820 bps on a coupon-only basis.

As of this writing, 30 shorter-dated 2020 pandemic CLOs have been reset and two have been refinanced in 2021, while 18 vehicles (excluding static deals) have yet to be addressed.

Looking to next year, the evolution of environmental, social and corporate governance in CLOs will undoubtedly remain at the forefront of market discussion.

Positive screening is firmly the next item on the agenda, with negative screening for ESG factors in CLOs now market standard in the form of eligibility criteria.

Among CLO managers, ESG scoring — i.e., the scoring of borrowers based on their ESG credentials — is now either reported, undertaken but not reported, or is in the process of being developed (either internally or alongside a third-party scoring provider).

One of the more recent European CLOs to have been highlighted for its positive ESG considerations is the €404.75 million Fidelity Grand Harbour CLO 2021-1 for FIL Investments International, which encompasses a portfolio test. Under the test, 50% of the portfolio has to be rated A-C, from an internal score ranging from A-E that Fidelity applies across its entire platform, according to sources. The process is understood to be treated similarly to other CLO tests (such as the weighted average rating factor test) on a maintain or improve basis, sources note.

Opting in
The Fidelity CLO is "aligned" with Article 8 — i.e., funds that promote environmental and social characteristics — under the EU Sustainable Finance Disclosure Regulation, or SFDR. The next step, however, would be for CLOs to officially opt-in to, and be marketed as, Article 8 funds.

To voluntarily opt in, managers must first define their ESG ambitions for their Article 8 fund, which could include a commitment to a minimum level of sustainable investments in their portfolio. Managers who opt in for Article 8 are required to provide a short-form precontractual disclosure, as well as provide periodic Article 8 reporting as an addition to their payment date reporting suite, sources note.

Chris McGarry, partner at White & Case, predicts that in the next 12-15 months, 100% of European CLO managers will opt in for Article 8 disclosure and reporting under the SFDR, as part of the broader rotation of global capital toward assets that promote ESG objectives.

The biggest hurdle to overcome for more ambitious Article 8 offerings, sources note, is the lack of available data, while CLOs arguably face a greater challenge to access borrowers directly, owing to their smaller positions on individual loan deals.

However, this situation is expected to change, given the clear definitions under the SFDR for both environmental and social assets. "Leveraged borrowers (and their sponsors) are rapidly understanding that they will attract better pricing when they make environmental and social covenants, for example around clean energy use, diversity and pay equity, and provide this data to their lenders," McGarry said.

Under the list of further headwinds, firms are still internally auditing for ESG, while the wider CLO market has been preoccupied this year with unprecedented levels of execution.

"We have seen before with CLOs, that some people push for a few years and then the floodgates open," McGarry added. "In 2018, 15% of EUR CLO new issuance had negative screening, while in 2021 that figure is 100%."

While negative screening has not moved the needle in terms of pricing, investors are nevertheless understood to have bought deals on the back of their ESG ambitions. As such, positive screening could well have a tiering effect as demand grows.

"Even if CLO managers don't want to do this — and they do — there is demand from the market and other stakeholders for companies to engage with the energy transition and the equality transition, and so CLO portfolios will continue to become a darker shade of ESG over the coming years regardless of structuring. This means we may see the CLO market move en masse to Article 8 while there will be scope for tiering for those with greater ESG ambitions," McGarry said.