In the U.S. CLO market, the bid remains strong throughout the capital stack, sources note, while S&P Global Ratings last week addressed capacity concerns amid increased demand for ratings, communicating that it would continue to limit new U.S. CLO engagements well into the summer. Meanwhile, the European CLO market is still in a sort of price discovery mode, with triple-A spreads widening, and levels in the low-to-mid 90s expected in the near term.
Issuance in 2021, through June 7:
* U.S. — $69.28 billion from 144 deals, versus $29.88 billion from 66 deals in the same period in 2020.
* Europe — €12.88 billion from 32 deals, versus €8.54 billion from 24 deals in the same period in 2020.
* Global — $84.79 billion from 176 deals, versus $39.28 billion from 90 deals in the same period in 2020.
A trio of U.S. CLO managers — Credit Suisse Asset Management, KKR and Octagon Credit Investors — last week priced their fourth new-issue deals of 2021, all of which cleared the market with tighter triple-A spreads than their previous offerings, which priced in April and May, but came in marginally wider further down the stack.
The tightest spread currently on offer for a new-issue transaction with a five-year reinvestment structure remains around 110 basis points, which was the level achieved by CSAM on its $508.6 million Madison Park Funding LI CLO, via BofA Securities.
The bulk of the triple-A notes on that deal priced at 110 bps, while coupons further down the stack came in at 170/195/305/627 bps from the double-A to double-B notes for a weighted average cost of capital of 160.68 bps, according to LCD. The manager’s previous offering, the $607 million Madison Park Funding XXXVII, priced in May at 112 bps across the triple-As with a 154.75 bps weighted average cost of capital, according to LCD data.
Octagon Credit Investors' offering, the $508.4 million Octagon 54 CLO via Morgan Stanley, priced at 112 bps across the triple-A notes, with a weighted average cost of capital of 168.68 bps, according to LCD. Its previous print, the $512.07 million Octagon 51 CLO, cleared the market in April at 115 bps and 166.15 bps, respectively.
At 116 bps, the triple-A notes on KKR's $507.1 million KKR CLO 34, via Credit Suisse, came in marginally tighter at the top of the stack compared to its previous deal, the $406.05 million KKR CLO 33, which priced in early May at 117 bps. However, spreads came in wider lower down the stack for a WACC of 173.34 bps, compared to 167.40 bps in the prior transaction.
Including these latest prints, CSAM has priced a combined $2.345 billion of new-issue volume this year, while Octagon Credit Investors and KKR have priced $2.104 billion and $1.923 billion respectively, according to LCD data.
Elsewhere, in its third new-issue deal of the year so far, Sixth Street priced the $458.6 million Sixth Street CLO XIX, which is also the manager’s fourth new CLO since its split from alternative asset manager TPG. The latest deal, arranged by J.P. Morgan, priced at 110 bps across the triple-A notes, of which a sizable chunk was structured in a loan format.
S&P Global Ratings will continue to limit its acceptance of new U.S. CLO engagements — specifically new issues and resets — through at least August and likely beyond, as it addresses hiring and training needs to manage increased demand, according to an announcement published June 2.
"As the close of the second quarter approaches, there continues to be an unprecedented volume of transactions within the U.S. Collateralized Loan Obligation market," the rating agency wrote, reiterating its earlier full-year 2021 forecast of $120 billion of new-issue U.S volume.
"Along with an increase in the issuance volume of U.S. CLO new issues, resets and refinancings, S&P Global Ratings has seen an increase in the number of outstanding ratings to be surveilled, driven in part by the low number of maturities due to heavy reset volume," the announcement said.
The spike in new issues and deluge of resets and refinancings that have come to the market since the beginning of the year have put pressure on market infrastructure as a whole, with arrangers, law firms, rating agencies and investors grappling with a higher workload.
Over recent months, market participants in the U.S. have spoken about the difficulty in booking in time with Ratings in particular, which is understood to have limited new mandates for the past few months, owing to a sizable backlog.
CLO managers have commented to LCD that the rating agency has been inundated with resets and refinancings and has been particularly hit hard after picking up market share last year.
While some have voiced concerns over the potential for the backlog at S&P Global Ratings to cause delays for marketing new deals and addressing the richly priced 2020 vehicles whose non-calls roll off this year, others are confident the market will continue to move around the issue.
"The market will work its way out; arrangers are good at finding a way around these things," commented one CLO note investor.
On the asset side, the theme last week was leveraged loan issuers looking to the public markets, as Core & Main and EverCommerce rolled out new term loans to refinance debt in connection with planned IPOs. Several loan issuers have completed IPOs this year and repaid existing debt with proceeds, such as Aveanna Healthcare, Diversey, Hayward Industries and Latham Group, among others. It appears this trend could continue as a recent flurry of IPO filings has also included sponsored issuers Mister Car Wash, First Advantage and MeridianLink.
European CLO spreads continue to creep wider, most notably at the top of the stack, with triple-A notes on new-issue European CLOs having now widened to 85 bps or more, after two new-issue deals — Sculptor European CLO VIII and Bain Capital Euro 2021-1 — priced at 88 bps.
At this level, pricing at the top of the stack is now 11 bps north of the market tights set in March, which culminated in Sound Point Euro CLO V Funding pricing with a triple-A spread of 77 bps.
Indeed, prior to the €304.65 million Sculptor European CLO VIII, a new-issue European deal had not priced with a triple-A spread north of 85 bps since February, according to LCD, despite pricing inching wider since late April and resets — which price at a premium to new issues — trending toward the high 80s.
The Sculptor deal, for which a sizable portion of triple-A exposure was structured as a loan, priced at 160/210/310/645/925 bps on the floating-rate double-As to single-Bs on a discount margin basis, with a coupon-only weighted average cost of capital of 175 bps, according to LCD.
This was followed by the €405.9 million Bain Capital Euro 2021-1 CLO last week, which came in at 160/210/330/655/950 bps from the double-As to single-Bs on a discount margin basis, with a WACC of 174.81 bps, according to LCD.
Pricing at the top of the stack could well move wider still, according to analysts at Deutsche Bank. "AAAs are currently at a 90 area and, if price talk is anything to go by, expected to drift wider to a mid 90s level — a far cry from the 77 bps achieved by Soundpoint for a [5-year reinvestment period 2-year non-call back] in March," according to a research note published June 4.
While market participants over the past month or so have concurred that the mezzanine bid has remained strong while the market for triple-As widened, the double-B and single-B spreads on both aforementioned deals also came in wider than recent prints, pointing to a potential softening lower down the stack. In particular, the 950 bps single-B spread on Bain Capital Euro 2021-1 CLO is the widest for a new-issue print this year, according to LCD data.
However, market sources comment that mezzanine tranches remain well supported and this softening is not expected to be indicative of a longer-term trend.
While further price widening at the top of the stack would likely impact the viability of certain CLOs being able to refinance or reset, it remains to be seen what the impact would be regarding the timing of new issuance. One CLO manager commented last week that loan spreads need to be at 385 bps to make current liability spreads work, which has, in turn, led to a scramble for the remaining COVID-19-exposed discounted names in secondary, sending credits in travel and leisure sectors higher by up to 5 points in some cases over the past month.
However, according to LCD data, primary loan pricing would appear to broadly support this level, with the average single-B TLB spread during the second quarter so far coming in at 385 bps.
On the reset front meanwhile, yet another 2020 pandemic-era CLO has cleared the line last week, as Northwoods European CLO Management (Angelo Gordon & Co) priced the reset of Northwoods Capital 21 Euro CLO.
The original €204.7 million vehicle priced in July 2020, with a triple-A coupon of 150 basis points and a weighted average cost of capital of 252.87 bps, according to LCD. The reset increases the size of the vehicle to €430.8 million and pushes the non-call and reinvestment periods out by 1.5 years and 4.5 years, respectively. The bulk of the triple-As came in lower than the aforementioned two new-issue deals at 87 bps, although the structure included a €30 million chunk of triple-A liabilities paying 115 bps. Further down the stack, pricing came in at 155/210/325/635/925 bps from the floating-rate double-As to single-Bs on a discount margin basis.
Two refinancings also priced during the shortened week. The €234 million refinancing of the triple-A notes of Carlyle Euro CLO 2017-3 for CELF Advisors, for which the reinvestment period ends July 2022, priced at 70 bps, down from 74 bps previously.
Finally, Cairn Loan Investments refinanced six classes of notes from its Cairn CLO X, a 2018 vintage for which the reinvestment period ends April 2023, with pricing coming in at 78 bps across the triple-As, down from 100 bps previously.