With total supply volume — encompassing new issues, resets and refinancings — of $136.5 billion globally as of March 26, the CLO market is on course to close out the busiest quarter on record, according to LCD.
As of press time, looking to this week, should three deals price in either the U.S. or Europe, then a new record would also be set for quarterly new-issue deal creation, surpassing the 99 deals priced globally in the fourth quarter of 2020.
While conditions on the liability side remain comparatively tight on a historical basis, market participants on both sides of the Atlantic note that the elevated supply has pushed spreads marginally wider versus the market tights observed in February.
Year-to-date CLO new-issue volume, through March 26:
* U.S. — $38.28 billion from 79 deals, versus $17.88 billion from 35 deals in the same period in 2020.
* Europe — €7 billion from 18 deals, versus €5.83 billion from 14 deals in the same period in 2020.
* Global — $46.70 billion from 97 deals, versus $24.29 billion from 49 deals in the same period in 2020.
New-issue U.S. CLO volume now looks likely to exceed record quarterly figures for the CLO 2.0 era ($38.3 billion in the second quarter of 2014), which alongside refinancings and resets will cap off the strongest start to a year since the Great Financial Crisis.
On the back of a record first quarter, forecasts also point to the potential of a record year, with Citi last week increasing its new-issue forecast for 2021 to $130 billion, from $100 billion, according to sources. This would surpass the previous record of $128.86 billion recorded in 2018, according to LCD. On top of the $160 billion forecast for refinancings and resets, Citi analysts expect total supply for the year to come in at $290 billion, sources say.
On the new-issue front, Blackstone priced its second CLO of the month, the $508.025 million Thompson Park CLO. Pricing across the triple-A notes came in at 100 basis points to match pricing on its earlier print, the $457.26 million Basswood Park CLO. However, the weighted average cost of capital on the latest deal came in marginally wider at 149 bps, versus 142 bps on the Basswood Park CLO, with pricing coming in wider lower down the stack. Both deals were led by Citi and had a two-year non-call and five-year reinvestment structure.
Trinitas Capital Management and Ballyrock Investment Advisors both priced their first new-issue CLOs of the year.
The $511 million Trinitas CLO XV via Credit Suisse priced at 111 bps across the triple-A notes, with a WACC of 183.47 bps, according to LCD. This compares to a spread of 149 bps on the bulk of the triple-A notes on its November 2020 print.
Ballyrock Investment Advisors also priced at levels far tighter than its previous print at the end of last year. The $409.25 million Ballyrock CLO 15 via J.P. Morgan cleared with a triple-A coupon of 106 bps and a WACC of 155.24 bps, compared to 137 bps and 181.47 bps on its $400.9 million Ballyrock CLO 14 in December.
New CLO issuance was supported by another $14.7 billion of new-issue transactions launched into the leveraged loan market over the past week, with nearly half of that amount, $7.1 billion, linked to new LBO and M&A activity padded by the $2 billion deal for Ingram Micro Inc.
U.S. institutional loan volume surged to $172.84 billion in the first quarter of 2021 as of March 26, ranking as the highest quarterly volume of all time, surpassing the previous record of $171.4 billion that the market absorbed in the first quarter of 2017, according to LCD.
Triple-As drift wider
While managers are able to lock in liability spreads that are far tighter than they could have achieved at the end of last year, market participants note that pricing has drifted wider versus the market tights seen earlier in the quarter.
Broader market volatility and elevated supply have driven U.S. triple-A CLO spreads 10-12 bps wider at quarter-end versus their tights in mid-February, according to a research note published March 29 by BofA Securities.
"The widening in primary CLO spreads could cause refi/reset volumes to subside from their unprecedented levels observed this quarter next month," analysts at the bank wrote. "Primary spreads in other sectors have also widened on similar concerns and it is possible cross-asset investors look to take opportunity in those cohorts as well. In the mezz stack, primary RMBS spreads have widened on the back of extension risk as low-GWAC mortgage pools have been securitized, and for the first time look attractive vs. CLO mezz."
Nevertheless, investor demand is expected to remain strong, due to the floating-rate nature of the product, as inflation concerns cause 10-year Treasury rates to continue to climb, the report said.
2020 deals reach refi market
In another bumper week, the volume of resets totaled $2.83 billion from five deals, while $5.3 billion of refinanced notes priced from 14 transactions.
Pandemic-era deals are now filtering through to the refinancing and reset market. On March 26, Guggenheim Partners Investment Management, via Goldman Sachs, priced the $262.2 million refinancing of the Guggenheim CLO 2020-1 Ltd., a vehicle that originally priced in April 2020. The deal, for which the reinvestment period already runs until April 2023, priced at 99/150/255/375/715 bps on the triple-As through double-Bs. Prior to the refinancing, the floating-rate triple-A notes paid a coupon of 180 bps.
The European CLO market is set to close out the quarter with at least €7 billion of new-issue volume from 18 priced transactions, surpassing the €5.83 billion figure from the 14 transactions that printed during the same period last year, albeit in a quarter cut short by the COVID-19-related sell-off in early March 2020.
The pace of new-issue supply has eased somewhat in recent weeks, however. One new-issue deal had cleared the market during the week commencing March 22, following just one deal the week prior, while sources comment that only a handful of names occupy the near-term pipeline.
On March 26, Barclays priced the €407 million Northwoods Capital 23 Euro CLO for Northwoods European CLO Management, for which the triple-A spread came in just 2 bps shy of the current COVID-era benchmark low, at 79 bps.
The bulk of the triple-A rated notes were taken down in a loan format, split between tranches of €164 million and €50 million, with just €32 million structured as traditional CLO notes. Triple-A rated CLO tranches structured as a loan have been an increasing feature in the market of late, driven by investors such as State Street who receive better capital treatment for holding exposure in this format. In this instance, sources note that the larger loan tranche was taken down by a new investor, namely BofA.
Further down the stack, pricing came in wider than recent new issues at 165/240/360/650/925 bps on the floating-rate double-A to single-B notes on a discount margin basis. The double-A spread, for instance, ranks as the widest for a new-issue deal this year, while the single-A spread is the widest observed on a new-issue deal since Oak Hill European Credit Partners VIII on Feb. 10. The WACC on the deal — on a coupon-only basis — is 175.59 bps, according to LCD.
Attention remains fixed on resets and refinancings; however, market participants comment that the sheer volume of deals to come to market has made for trickier conditions toward the end of the quarter, which has weighed on mezzanine pricing, as well as triple-A spreads on longer-dated refinancings.
During the week commencing March 22, two resets and three refinancings priced, with pricing trending slightly wider than the market tights observed over the past month or so.
On the reset front, the €414 million reset of Anchorage Capital Europe CLO 2 via Credit Suisse priced at 85 bps across the triple-A notes, in a deal that pushes out the vehicle's non-call period to October 2022, and the reinvestment period to July 2025. This compares to a coupon of 96 bps on the floating-rate triple-A notes on the original 2018 transaction, according to LCD data.
The 85 bps triple-A coupon on Anchorage is the widest for a reset since the reset of Dryden 44 Euro CLO 2015 on Feb. 8, which priced at 88 bps, with seven resets pricing at the market tight of 79 bps since then.
However, the caveat to any commentary on reset pricing is that reducing liability costs is only one of the benefits of doing so. It also allows the manager to extend the reinvestment period of the vehicle, and provides an easier route to adopt updated Moody's weighted average rating factor language, as well as the workout loan language that emerged last year.
There was perhaps further evidence of widening triple-A spreads in the longer-dated refinancings to price last week, which continue to trend wider versus the low-60 prints observed in February; however, pricing does remain comparatively tight on a historical basis.
The €312.2 million refinancing of CVC Cordatus Loan Fund XII for CVC Credit Partners became the latest refinancing to price at 75 bps across the upper-most-rated notes. The CLO — a 2018 vintage — has plenty of room to run on its reinvestment period, which ends July 2023, while the new coupon is significantly lower than its original coupon of 96 bps.
The €336 million refinancing of Harvest CLO XXI for Investcorp Credit Management, via Barclays, followed, with the floating-rate triple-A notes pricing at 76 bps. The original 2019 deal has a reinvestment period extending to October 2023, and the floating-rate triple-A notes previously paid a coupon of 108 bps.
"From rating agencies to law firms, deals have clogged up the system and the refinancing market has widened at the top," commented one CLO manager, noting that the refinancing focus may shift to the pool of 2019 vehicles whose non-call periods have already run off, and which generally priced wider than their 2018 counterparts.
As a rudimentary calculation, the average triple-A spread for a new-issue CLO in 2019 was 105 bps, compared to 86 bps in 2018, according to LCD data.
CLO note investors over recent weeks have spoken of capacity constraints in the market on the back of the sheer volume of deals, with one investor consulted this week noting that some refinancings of late have taken longer to attract interest from triple-A investors than earlier in the quarter.