New tight prints for triple-A tranches are being set on an almost weekly basis in the U.S. CLO market, while Europe took an immediate leg lower earlier in the year and has stayed there, for now. Decent loan issuance is also spurring a strong start to the year for CLO formation, with global supply levels easily outstripping the start of 2020.
Year-to-date CLO new-issue volume, through Feb. 8:
* U.S. — $13.81 billion from 27 deals, versus $6.89 billion from 12 deals in the same period in 2020.
* Europe — €2.34 billion from six deals, versus €2.49 billion from six deals in the same period in 2020.
* Global — $16.64 billion from 33 deals, versus $9.64 billion from 18 deals in the same period in 2020.
The strong start to the year for CLO creation continues, with clear daylight between the start of this year and last, as more than twice the number of new issues have printed for roughly double the volume. Clearly, the market is outperforming a year ago, despite the COVID-19 crisis.
Put simply, this is because liabilities are roughly 20 basis points tighter on a weighted average cost of capital basis than a year ago. The WACC is in a broad 150 basis points to 170 basis points range for a 5/2 (five-year reinvestment period/two-year non-call period) deal.
Moreover, liability costs keep falling, with yet another new tight print for this COVID-19 era set at the top of the stack last week, with Carlyle pricing its triple-A tranche, via BNP Paribas, at L+114 for a 5/2 deal and BlackRock Financial Management pricing its, via Morgan Stanley, at L+99 for a 3/1 deal. The previous tights came from Oak Hill Advisors LP at L+119 and Neuberger Berman Loan Advisers at L+106, both on Jan. 27. All five tight prints for the COVID-19 era at the top of the stack for both 5/2 and 3/1 deals have been set since Jan. 15.
That said, tight liabilities are not the only driver of issuance, as risk appetite is also robust, allowing managers with different styles and collateral pools to come to market too. Indeed, Vista Credit Partners late last week sold its latest CLO, the VCP CLO II, with the triple-As on the 2/1 deal up at L+167, while the double-Bs were at a L+841 bps coupon and 900 bps discount margin. Sources comment that the collateral pool is very "tech focused," contributing to the wider liabilities.
Meanwhile, loan supply, while not quite as strong as a year ago — there was $64.7 billion of institutional loan issuance in January 2020 versus $48.9 billion last month — is proving sufficiently high to ramp with. The last week of January featured $23.3 billion of loan launches, which is a veritable gold mine for CLO rampers.
At the same time, loan spreads are holding steady this year, with the institutional B+/B rated spread up a smidgen in the week ended Feb. 5 to L+358, from L+355 the prior week, and the average yield to maturity up to 4.28%, from 4.23%. The downside versus this time last year, though, is that although the spread over Libor is nearly the same, the average yield to maturity is almost 100 bps lower. Indeed, for the week through Feb. 13, 2020, those equivalent numbers were L+351 and 5.49%.
Still, better to hunt paper in the primary than the secondary market, which continues to rally, though this is in part due to CLO ramping as well as large inflows to loan retail funds. The S&P/LSTA Leveraged Loan Index rose 117 bps in January to 97.37, and is up roughly 3 points since the Pfizer vaccine news on Nov. 9, 2020. Moreover, almost 50% of the Index was between 99 and par at the end of January, while 75% were priced at 99 or higher.
S&P Global Ratings last week released a report entitled "CLO Spotlight: How COVID-19 Affected U.S. Middle-Market And BSL CLO Performance In 2020."
The key takeaways from the report are that both U.S. broadly syndicated loan CLOs (BSL CLOs) and middle-market CLOs (MM CLOs) experienced credit stress due to the pandemic, but most transactions saw material improvement in the second half of the year, though not enough to make up for the deterioration from the first half.
Ratings adds that, like BSL CLOs, MM CLOs experienced a significant increase in their CCC buckets in 2020, but that unlike BSL CLOs, MM CLOs, on average, did not lose par in 2020. Meanwhile, MM CLOs experienced a less severe decline in overcollateralization (O/C) cushion. About 5% of S&P Global's sample of MM CLOs experienced a junior O/C failure at some point in 2020, compared to just under 25% of its BSL CLO sample.
Current liability spreads in the European CLO market are facilitating the return of those managers that chose to sit out 2020, while Europe saw its first debut issuer of the year in what remains a busy market.
Assured Investment Management last week launched the €357.4 million BlueMountain EUR 2021-1 CLO via Barclays, with initial price talk released at 83/135/210/300/575/850 bps (area for all). At these levels, price talk at the top of the stack tracks in line with the pandemic-era benchmark low of 83 bps set by KKR Credit Advisors' €408 million Avoca CLO XXII, while talk is marginally wider further down the stack than in KKR's offering.
The vehicle is the manager's first under the Assured Investment Management banner. The manager — a subsidiary of financial guarantor Assured Guaranty that was formerly known as BlueMountain Capital Management — last priced a new issue European CLO in October 2019, namely the €358.3 million BlueMountain Fuji Euro CLO V. Pricing on the latest vehicle is targeted for late in the week commencing Feb. 8.
Commerzbank AG, which also sat out 2020 — last pricing a new-issue European CLO in November 2019 — is also in the market with the €360.45 million Bosphorus CLO VI via Deutsche Bank. Assured Investment Management and Commerzbank are just two of the 15 managers to have printed in 2019 and not returned to the market in 2020, according to LCD.
As of press time, three new CLOs had priced since last week's roundup, with the triple-A notes on all three coming in below 90 bps. Anchorage, which also did not price a new issue deal in 2020, priced the largest CLO to clear the market since the onset of the pandemic after the deal was upsized from its €411.1 million target amount to €463.3 million.
Pricing came in at 87/150/220/320/600/825 bps on the floating rate triple-As to single-Bs on a discount margin basis, while the weighted average cost of capital on a coupon-only basis is 177.57 bps, according to LCD.
The pricing of Neuberger Berman's first European new-issue 2.0 CLO was eye-catching for several reasons and none more so than the tight liability spreads it attracted despite being a debut issuer in the European market.
The €307.3 million Neuberger Berman Loan Advisers Euro CLO 1 via Morgan Stanley priced at 88/135/210/300/580/850 bps on a discount margin basis, with a WACC on a coupon-only basis of 165.46 bps, according to LCD. The deal is understood to have benefitted from a high ramp at pricing, which is said to have been around the 85% mark, while the triple-A tranche was multiple times oversubscribed, according to sources.
While Neuberger Berman has a long track record as a European loan player and managing CLOs across the pond — printing four U.S. vehicles totaling $1.9 billion in 2020 — a print of 88 bps for the triple-A paper nevertheless stands out.
While not a debut European issuer, Palmer Square Europe Capital Management on Feb. 8 priced its first European CLO with a reinvestment period, following the printing of two static CLOs in 2020. The deal, led by J.P. Morgan, priced at 87/135/220/315/600/825 across the triple-As to single-Bs on a discount margin basis, while the WACC came in at 164 bps, according to LCD.
Just six deals into 2021, and already the current benchmark low for triple-A spreads is 83 bps. That a debut manager is able to print below 90 bps, and just 5 bps off that current tight, therefore provides an early indication that manager tiering at the top of the stack remains much more a U.S. staple — that is, unless a more established European tier-one manager comes in markedly lower over the coming weeks.
With one debut manager on the scoreboard, others are now expected to follow. Market sources say that a handful of debut managers are expected to tap the European CLO market this year, comprising the usual mix of established U.S. managers and big European credit shops.
For comparison, of the 42 managers that came to the market in 2020, five were debut managers.
Given how quickly the market tightened from 105 bps to 87 bps, and then from 87 bps to 83 bps, there is a case to be made for further tightening at the top of the stack. Indeed, one CLO manager last week estimated that the market could see triple-As in the high 70s fairly soon (albeit not much tighter than that), noting that large triple-A investors who traditionally get involved in the market from February onwards were a factor in favor of further potential tightening.
In a research note published by J.P. Morgan on Feb. 8, analysts at the bank introduced a new issue European CLO triple-A spread target of E+70 bps by year-end 2021. "Low yields, declining spread product net supply, and modest net CLO supply growth in a 'permanent capital market' (refinancing or reset of older vehicles not contributing to net market expansion) are supportive of technicals. On the flip side, the grind tighter is leading to accelerating velocity of callable activity as more bonds price above par," analysts wrote.
This rapid compression of European CLO liability spreads, which has occurred further and faster than most would have expected, and the resulting pickup in CLO activity is considered one of the key technicals in support of loan market issuance.
At current levels, secondary loan prices are understood to make for a trickier ramp, which has driven attention to the primary market. "Managers are all about allocations they can get in primary right now," commented one senior banker.
The primary loan market has been awash with reverse-flexes and deadline accelerations of late, with defensive, well-liked credits achieving E+350 bps at 99.5. Despite the tightening in loan spreads, managers are understood to remain confident on their ability to ramp, and to do so quickly. One CLO manager commented last week that with primary loans coming in at E+350, the CLO arbitrage still works. As a back-of-the-envelope calculation, this would be supported by the 150-177 bps WACCs on the last six CLO prints.
On the reset front, spreads on recent prints moved more in line with their new-issue counterparts, with the triple-A spread on the €461.7 million reset and upsize of the CVC Cordatus Loan Fund IV CLO by Morgan Stanley matching the current 83 bps new issue tight.
Indeed, the last three resets to print have all come in at 90 bps or lower. The €372.19 million reset of Clarinda Park CLO for Blackstone via BofA Securities came in at 90 bps, while the €413.15 million reset of Dryden 44 Euro CLO 2015 for PGIM via J.P. Morgan priced at 88 bps.
Elsewhere, Deutsche Bank is out with the €397 million proposed refinancing of Harvest CLO XVI for Investcorp Credit Management. The refinancing covers six classes of notes, spanning triple-As to double-Bs.
Already this year, three refinancings have priced, which sources note reflects that investors deemed the reduction in the cost of the liabilities resulting from a refinancing to be more attractive than extending the life of the transaction in those instances, adding that a subsequent reset could be carried out once the extended non-call runs off.