In a market that has now absorbed nearly $40 billion of new issue supply in 2021, as well as a glut of refinancings and resets, there were further signs last week of widening spreads lower down the capital stack, where the investor base is shallower. Triple-A tranches, however, remain well supported and continue to push to new market tights, while a deal with a rare five-year reinvestment period was featured in Europe.
Year-to-date CLO new-issue volume, through March 12:
* U.S. — $32.42 billion from 66 deals, versus $17.88 billion from 35 deals in the same period in 2020.
* Europe — €6.19 billion from 16 deals, versus €5.83 billion from 14 deals in the same period in 2020.
* Global — $39.88 billion from 82 deals, versus $24.29 billion from 49 deals in the same period in 2020.
While supply remains strong in the U.S. — be it new issue CLOs or reset and refi activity — there are signs of tentative widening in liabilities below the triple-As. For now, pricing at the top of the stack is sticky, but tranches below are pushing out.
Both Carlyle and Octagon Credit Investors issued last week and prior to that in February, thus offering points of comparison, with all the deals sporting five-year reinvestment periods. While Carlyle locked in an L+106 basis points print on the triple-As last week, two basis points tighter than its previous deal on Feb. 26, both the double and single-As are widened, namely to L+150 bps last week from L+120 bps in late February, and to L+165 bps from L+140 bps on the single-As. Last week's deal did not offer triple- or double-B notes.
Meanwhile, Octagon's new issue last week came at L+103 bps on the triple-As from L+119 bps in early January, but the double-As priced at L+155 bps last week versus L+145 bps previously. The early February deal did not offer triple- or double-B notes.
Like-for-like comparisons in the mezz notes are harder to come by, but sources comment this is where most of the widening is occurring, as highlighted by two recent new issues. Last week Symphony Alternative Asset Management LLC set a new COVID-era tight at the top of the stack, at L+98 bps, surpassing the week prior's then-record for a five-year reinvestment period of L+99 bps from Allstate Investment Management.
However, Allstate's AIMCO CLO 14 has a lower weighted average cost of capital than Symphony's CLO XXV, namely 139.23 bps versus 149.35 bps. This is because while AIMCO issued its triple- and double-B notes at L+290 bps and L+575 bps, Symphony priced at L+360 bps and L+650 bps — all on a coupon basis.
Meanwhile, the spread widening has also been noted by analysts at BofA Securities, who comment in their weekly report, "CLO spreads continued to widen this week driven by elevated supply over the past several weeks. February 2021 saw the highest combined primary and secondary volume on record at $43 billion (the next highest was in June 2017 at $36 billion). Through this month, total supply has been at $21 billion and looks to match, if not exceed last month's record … Over the week, BBBs and BBs widened by 30 bps each and single Bs widened by 50 bps due to elevated supply and increased broader market volatility. At the top of the stack, spreads were slightly wider with AAs widening by 5 bps through the week."
While liabilities may be a little wider, managers still have plenty of new money loan supply to aid their ramp, even if the use of proceeds is likely punchier than they might wish for. Indeed, dividend recaps have increased recently, and over last week $5.8 billion of new-issue volume in the institutional loan market has backed deals that will be used, at least in part, to pay shareholders. To put that into perspective, that is more than the volume in three of the prior four months (February was the exception, with $7.9 billion).
All of which helps keep the run-rate of institutional loan issuance well ahead of the same period last year, namely $145 billion versus $88.7 billion, or 63% more.
And in the face of wider liabilities, new-issue loan spreads are still sticky. Indeed, the average yield to maturity for B+/B rated deals rose 3 basis points, to 4.41% last week. At the same time, secondary levels are steady too, with the S&P/LSTA Leveraged Loan Index largely unmoved this month so far, at an average bid price of 97.7 from 97.8 at the start of the month.
Three new issues totaling €1.2 billion, one refinancing, one reset and the first European CLO re-issue for two years cleared the market in the week ended March 12.
As has been the prevailing theme for a number of months against a backdrop of strong opportunistic loan supply, with borrowers largely seeking to cut their cost of debt, the CLO market has set yet another fresh tight print at the top of the stack.
It might be early days for Jefferies as an arranger in the European CLO market, but the team there is certainly making its presence felt. Likewise at Sound Point, which debuted in the European market less than two years ago, and has now completed a fifth deal.
The combination of the two has led to the Sound Point Euro CLO V new issue printing at just 77 basis points for the triple-A notes, as well as including the longest reinvestment period for a new issue in the CLO 2.0 era. This might only be 3 basis points tighter than the previous pandemic-era tights, but the level is eye-catching as it breaks into the 70s. Indeed, triple-As on a European CLO have not priced with a seven-handle since May 2018, while 77 bps hasn't been matched or beaten since April 2018 — and that was a 4.5-year reinvestment period deal, namely Avoca CLO XVIII.
The triple-As are understood to have been filled early in the process for Sound Point's deal, so it is not clear whether a print as tight as this is a sign of things to come, especially as the general financial market backdrop is becoming more volatile. But market participants are adamant that there is a lot of demand for new issues in this post-vaccine world, and that this demand stretches through the stack.
Another eye-catching development on Sound Point's latest CLO is how the deal is structured. It includes a triple-A bond and loan note, and fixed and floating double-As, while the single-As are split into two tranches (with one having no Euribor floor for a couple of years, and then the coupon steps down and a floor is introduced). This structure highlights that the European CLO market is flexible, and is showing a maturity that the far-larger U.S. market has showcased for years.
The Sound Point deal was not penalized for its longer duration further down the stack either, with a weighted average cost of capital of 166 bps. This is fractionally tighter than the other two new issue vehicles to price during the week — Blackstone's €405.6 million Carysfort Park CLO via BNP Paribas and Hayfin Emerald's €403.8 million Hayfin Emerald CLO VI via Goldman Sachs — both of which priced with a WACC of 168 bps on a coupon-only basis, according to LCD.
On the reset front, a loan note also featured in the reset of Aurium CLO V for Spire Management, which became the fifth reset to price at 79 bps across the triple-A notes. However, as with the three resets that priced the week commencing March 1, pricing came in wider further down the stack. The 975 bps spread on the single-B notes on a discount margin basis is the highest for a reset this year, according to LCD data.
Morgan Stanley on March 12 priced the €416.7 million re-issue of Contego CLO VI for Five Arrows Managers, which is the first re-issue to take place in the European market since March 2019, according to LCD data. The deal, which has a 4.25-year reinvestment and 1.5-year non-call structure, priced at 79 bps across the triple-A notes.
While the flexibility of the CLO market was on display last week, there was also a reminder that not every innovation or flexibility pays off. Last week's €242 million, 49-name loan BWIC, which comprises 51 line items of loans denominated in euros and sterling, is understood to be the liquidation of Dryden 63 GBP CLO for PGIM Ltd., say sources away from the deal.
This CLO was issued in July 2018 and was the first 2.0 CLO with all notes sterling-denominated. To make such a deal work smoothly, the collateral pool would need to be heavily made up of sterling assets; otherwise, myriad cumbersome swaps would be needed. Ultimately, numerous sources away from the deal comment that maintaining enough attractive sterling assets has proven too difficult, and equity holders therefore decided to take advantage of the current appetite for loans in the secondary market, and liquidate the portfolio.
2020 CLOs emerge in reset pipeline
Spire Partners became the fourth European CLO manager to signal its intention to potentially reset a vehicle that priced in 2020, filing a notice for its Aurium CLO VI last week on Euronext Dublin.
The €216.95 million Aurium CLO VI priced in June 2020 via BofA Securities, with the triple-A notes printing at 190 bps. The non-call period runs until May 22, while the reinvestment period ends May 22, 2023, according to LCD.
By comparison, the manager's new issue €402.4 million Aurium CLO VII priced last month (Feb. 12) with triple-As at 83 bps, while the €411.4 million reset of Aurium CLO V last week (March 11) priced at 79 bps across the triple-A notes.
LCD counted at least seven new notices on Euronext Dublin last week from managers mulling the potential reset or refinancing of outstanding CLOs, the remaining six of which were for pre-2020 vehicles.
Bardin Hill is selling its European CLO business to HPS Investment Partners, which will expand HPS' CLO portfolio to 11 vehicles, totaling €4.1 billion, according to LCD data.
The analyst team will move over to HPS, according to a research note published by Deutsche Bank on March 12, while David Snyder, head of Bardin Hill's European CLO business, is retiring.
Bardin Hill will now focus on its core U.S. businesses, which span U.S. CLOs, opportunistic credit — the group launched its inaugural opportunistic credit fund in April 2020 — and merger arbitrage, according to sources familiar with the transaction.
In February, Bardin Hill priced the $422 million Bardin Hill CLO 2021-1 via Barclays, which was the manager's first CLO issued under Phil Raciti, who joined Bardin Hill in September 2018 as head of U.S. performing credit.