New-issue collateralized loan obligation activity is picking up, and new tights at the top of the liability stack either have been set or will be set shortly. Moreover, reinvestment periods are lengthening, and in many respects structures are similar to how they looked pre crisis. All that is now needed to get the CLO machine really firing is an increase in loan issuance. Meanwhile, it is not just the CLO new-issue market that will keep liability investors and equity providers busy — partial refinancings continue en masse in the U.S., while a sizable reset and refinancing pipeline is building in Europe.
Year-to-date collateralized loan obligation new-issue volume, through Jan. 15, 2021:
* U.S. — $1.7 billion from four deals, versus $1.1 billion from two deals in the same period in 2020.
* Europe — There have been no new issues yet.
* Global — $1.7 billion from four deals, versus $1.1 billion from two deals in the same period in 2020.
The first true new deals of the year have been issued, and there are encouraging signs for the coming months as a new triple-A tight was set; weighted average costs of capital, or WACCs, are generally in the same zip code as late last year; at least one of the deals came at good size; and reinvestment periods are back at the full five years.
The new tight at the top of the stack for the COVID-19 era was set when Goldman Sachs priced the $429.75 million Sixth Street CLO XVII for Sixth Street CLO XVII Management. This is L+124 basis points, surpassing the previous tight for a five-year reinvestment period deal of L+132 bps. It is also 14 bps tighter than the fourth-quarter 2020 average for all triple-As.
The other two new issues of the week, the $507.25 million Venture 2021-41 CLO for MJX Asset Management LLC, via Jefferies, and $399 million Gulf Stream Meridian 3 for Meridian Credit Management LLC, via Barclays, priced at L+133 bps and L+132 bps, respectively, at the top of the stack. Both deals came with other smaller triple-A tranches, whereas Sixth Street did not.
Moreover, MJX’s new issue is well above the average size for new issues in March-December 2020 of $412.3 million, while the 2019 average deal size was $481 million.
Furthermore, all three new issues sport a full five-year reinvestment period, a feature that totally dried up in the immediate wake of the pandemic outbreak, but by late 2020 was being more frequently used. This leaves one notable feature still missing in most COVID-19-era deals, namely single-B tranches, and none of last week’s deals came with this tranche.
Meanwhile, managers, liability investors and bankers agree that for the CLO new-issue pipeline to really get going, the new-issue loan market needs to ramp up. So far this year, $14.2 billion of institutional loans have launched, a long way off the $64.7 billion seen in all of January 2020, and less than half the $44.7 billion average January volume for 2106-2020. What’s more, the relative paucity of paper means loan pricing is tightening, with nine reverse-flexes already this year. Indeed, new-issue spreads for institutional loans from issuers rated B+/B dropped to L+364 last week, from L+399 the week before.
Still, secondary liabilities are tightening. Indeed, analysts at BofA comment that "CLO spreads were tighter by 5-25 bps across the capital stack as investor demand remained robust, despite higher primary and secondary supply."
This is helping drive an ongoing surge in partial refinancings, and already this year 14 deals have been partially refinanced. What will be of interest next is whether there will be a wave of resets. Many deals were structured last year with short non-call periods to give flexibility to lower what are now inflated WACCs.
Any such wave is unlikely to get going for a few months due to non-call periods being a year, but liability investors comment they are being warmed up for some reset activity, and they are questioning whether the market dynamics will make sense for them. Managers will benefit, as they get to reset, or even further lengthen, the reinvestment period, meaning more years of manager fees, but there is some skepticism among investors regarding their level of benefit.
Still, the refinancing market was given a further boost last week as Seix Investment Advisors LLC successfully refinanced its Mountain View CLO XIV via an applicable margin reset, or AMR, auction, through the KopenTech platform. In doing so, it has reduced the weighted average cost of those notes — in this instance the investment-grade notes — to L+148 bps, from L+180 bps.
The successful completion means there have now been two AMR auctions hosted on the KopenTech platform, the other being the refinancing of TCW 2019-1 CLO in January 2020.
More are likely to follow. KopenTech had identified six CLOs with the AMR feature that will be out of their non-call period in 2021, a total of $2.15 billion. Excluding the Mountain View CLO XIV, potential candidates for AMR refinancing are, in order of when they closed, Atlas Loan Fund VIII, Mountain View CLO 2017-2, Catamaran CLO 2014-1, TCW CLO 2019-1, and Columbia CLO 29.
Primary issuance is now up and running in the European CLO market, with Redding Ridge Asset Management and Napier Park in contention to be the first manager to print a new-issue CLO in 2021, with both deals penciled in to price this week.
An indication of where the market currently is can be gleaned from the price talk on Redding Ridge's €402 million RRE 6 Loan Management CLO, which points to a significant further tightening in liability spreads.
Price talk on the Citi-led deal is indicated at the low-to-mid-90s across the €240 million triple-A notes, while the double-A notes are talked at 140-150 bps. For context, the tightest spreads for triple-A and double-A notes since the onset of the pandemic are currently 105 bps and 150 bps, respectively.
Tightening in primary liabilities is supported by a secondary market that has been steadily tightening since traders returned to their desks in January. In a research note published Jan. 18, analysts at BofA Securities observed indicative spread levels last week of 90/165/230/340/590/860 through triple-A to single-B paper, indicating a week-on-week tightening of 10 bps on triple-As; 5 bps on double-As; 10 bps on single-As, triple-Bs and double-Bs; and 15 bps on single-Bs.
Further, liability investors have commented on a lack of opportunity in the secondary CLO market, which could further fuel demand for primary paper.
Napier Park Global Capital's offering — the €407 million Henley CLO IV — is being marketed by Barclays, while Neuberger Berman Europe Limited is also currently in the market with its European debut €306.5 million Neuberger Berman Loan Advisers Euro CLO 1, which is being led by Morgan Stanley with pricing targeted for the end of January or the beginning of February.
All three deals have reinvestment periods of four years or slightly more — reverting toward pre-pandemic norms — while non-call periods are also longer than most pandemic-era deals at 1.25 years for Neuberger Berman and 1.5 years for both Redding Ridge and Napier Park.
The CLO pipeline has built to encompass a varied mix of managers and arrangers at the start of what is expected to be a more favorable year for issuance volume than 2020.
While plenty more warehouses are open or in the works — sources comment that there are more than 40, with one source putting the number at 44 — LCD counts at least 23 deals that are further down the track, including mandates for the European market's newest arranger, Jefferies.
The expectation that liability spreads will continue to tighten is a key plank of support for new activity. Warehouses are open — facilitated by warehouse terms that are back to pre-pandemic levels, or in some cases more aggressive — managers are ramping, and demand is there for good quality CLO paper.
With refinancings and resets expected to feature heavily this year, particularly boosted by the short-duration vehicles that priced in 2020, some have questioned to what extent this might cannibalize new issues further down the line. Moreover, those looking to reset last year's deals will likely look to increase their size too, given that new-issue sizes last year were described as sub-optimal by some managers, and this in turn will use up even more liability powder.
Certainly, there is a strong potential pipeline for such deals, as a total of 69 European CLOs came out of their non-call periods last year — nearly all of which have carried a weighted average cost of capital below current levels, according to LCD data. Moreover, a further 108 European CLOs are due to come out of their non-call periods in 2021, a figure that has been inflated by the 41 short-duration vehicles that printed last year with the view to potentially refinance at more favorable spreads this year.
This all suggests a potential record-breaking year for the number of CLO resets in 2021, with 2018 the current record holder at 34 (LCD's records for resets begin in 2017).
Historically, a manager takes on average two to three years to reset or refinance a deal from initial pricing, according to LCD data, though managers last year opted for shorter-dated vehicles precisely to give more optionality to the equity to reset sooner, while also trying to keep liability costs down at a time when they were ballooning. It will therefore be interesting to see if that average time comes down. Indeed, in 2016, deals being reset had an average age of 2.96 years, falling to just 2.10 years in 2018, with the average length of time then rising to 2.50 years in 2019. There were only two resets last year, with an average age of 2.90 years.
Against this backdrop, the refinancing and reset pipeline continues to build. As of publishing, LCD counts at least ten managers who have announced in filings on the Euronext Dublin that they are considering refinancings or resets on existing deals.
Expected to price this week is the €414.45 million reset of Partners Group's Penta CLO 5, a vehicle that originally priced in November 2018. The deal, which is being led by BNP Paribas, is offered with a non-call period of around 1.5 years and a reinvestment period of around four years, while the triple-A notes are talked at 98-100 bps.
Five Arrows, HPS Investment Partners and Intermediate Capital Group added to the pipeline following filings on Jan. 18. Five Arrows Managers announced its intention to potentially refinance the €361.9 million Contego CLO IV (2017); HPS Investment Partners is exploring the potential refinancing of the €411 million Aqueduct European CLO 1-2017; and a notice of intention to refinance was also issued for St Paul's CLO VI, which is managed by ICG and was last refinanced in 2018.
Further, Blackstone announced on the Euronext Dublin last week that it was exploring the refinancing of two CLOs, Dartry Park CLO and Clarinda Park CLO. Dartry Park priced in February 2015 and was last refinanced in June 2017, while Clarinda Park originally priced in September 2016 and was refinanced in April 2019.
Similar notices were also issued for Dryden 46 Euro (2016), previously refinanced in May 2019; CVC Cordatus Loan Fund IV, previously reset in 2019; and Invesco EURO CLO I (2018). These follow notices for BlueMountain Fuji EUR CLO II (2017) and PineBridge's Euro Galaxy V CLO (2016) the week prior. Euro Galaxy V CLO was last refinanced in July 2019.
This all chimes with comments from bankers that reset and refinancing activity will be elevated and busy in the coming months.