CLO activity was lighter on both sides of the Atlantic as the market appeared to ease into the traditionally quieter late-summer period.
Issuance in 2021 as of Aug. 16 stands at:
* U.S. — $99.60 billion from 205 deals, versus $48.36 billion from 111 deals in the same period in 2020.
* Europe — €20.99 billion from 52 deals, versus €12.67 billion from 38 deals in the same period in 2020.
* Global — $124.75 billion from 257 deals, versus $62.47 billion from 149 deals in the same period in 2020.
Light levels of activity in the U.S. CLO market last week reflected seasonal trends, with only three pricings of new-issue CLOs totaling $1.616 billion. Six refinancings/resets totaling $2.035 billion were priced.
Year-to-date through Aug. 16, the record pace of U.S. primary issuance has reached $99.6 billion across 205 deals from 102 managers. That level already exceeds the 2020 full-year total of $93.54 billion, and is closing in on the full-year 2019 volume of $118.87 billion.
The tally of U.S. refinancing deals is now $76.91 billion on the year, from 197 transactions, while resets reached $84.31 billion across 159 deals.
New-issue U.S. deals
For August, new-issue deals total $7.19 billion across 14 CLO offerings.
The tightest triple-A spread for a new-issue U.S. CLO last week was L+116 for the $510.7 million Carlyle US CLO 2021-7, in a pricing via BNP Paribas for Carlyle CLO Management LLC. Bain Capital Credit garnered the second-tightest triple-A rate at L+117 for the $605.2 million Bain Capital Credit 2021-4 CLO, arranged by Jefferies. That coupon was the largest senior-note rate among the four deals Bain has printed in 2021, however.
Citigroup last week priced the $500.35 million KKR 35 at a senior-note rate of L+119, according to market sources. The KKR 35 CLO deal pushes KKR Financial Advisors LLC past the $2 billion issuance mark for 2021.
Month-to-date pricings of refinancings and resets is a combined $8.48 billion from 17 deals.
Among the deals last week, Goldman Sachs priced a $500.7 million refinancing of Anchorage Capital CLO 9, a 2016-vintage deal that was previously reset in 2019 for Anchorage Capital Group LLC.
Also being refinanced again is Vibrant CLO IV, through a $328.3 million partial refinancing arranged by Morgan Stanley to narrow the primary triple-A spread by 26 basis points, to L+112. Vibrant IV was also reset in 2019.
Wells Fargo Securities has priced a slightly upsized $458.68 million reset of Eaton 2020-1, a short-term, pandemic-era CLO issued in July 2020 by Eaton Vance Management. The transaction features a triple-A spread of L+117.
Credit Suisse led a $483.49 million reset for Pikes Peak CLO 3 with a reduction in the primary triple-A tranche to L+120, from the original-issue coupon of L+143. The deal is the third reset this year by Partners Group.
CIFC Asset Management carried on its busy 2021 calendar with an eighth reset for 2021: the $607.485 million reset of CIFC Funding 2019-III via Citigroup.
Marathon Asset Management narrowed its triple-A liabilities by 20 bps to L+132 on the first-pay senior note tranche for Marathon CLO XIII, another 2019 deal.
The lone middle-market transaction from last week was Wells Fargo pricing the refinancing of the $748.05 million Golub Capital Partners CLO 49 (M), a one-year-old vehicle now with a new triple-A spread of L+153 for both a $403 million Class A-R tranche and a $30 million Class A-Loan tranche.
First-ever CLO 2.0 defaults
S&P Global Ratings on Aug. 10 issued its first-ever default ratings for a pair of junior note tranches in post-financial crisis CLOs, following July trustee reports that showed insufficient proceeds from deal liquidations to pay down the tranches in full. More may follow, the rating agency warned.
The default ratings were assigned to the Class F tranche (outstanding balance of $5.2 million) of Flagship VII LLC issued in 2014 by Deutsche Asset Management, and $4.9 million in standing Class E notes from Mountain Hawk II, a 2013 deal printed by Western Asset Management.
Both tranches had been rated CCC- since September 2020, as both deals suffered credit deterioration and O/C test failures following the COVID-19-related economic downturn last year, according to the rating agency. Both had also previously suffered from the energy and commodities-market slowdown in 2016 and 2017, Ratings noted in a CLO credit-metrics brief issued Friday called "CLO Insights 2021 U.S. BSL Index: Reinvesting CLOs Continue To Show Stable Performance, But First CLO 2.0 Tranches Default."
"Both transactions faced credit deterioration during their reinvestment periods before starting their amortization periods in 2017 and 2018," the report stated. The subsequent pandemic stress "would likely have made it difficult to optionally redeem these two transactions in 2020 as the notes continued to pay down," the report continued.
Ratings also reported that six other junior tranches of CLOs it did not identify in the report also carry CCC- or CC ratings, "all of which are likely candidates for future default."
Voya projects wider AAAs
Voya Investment Management believes the market expects wider CLO triple-A spreads by the end of the third quarter, "driven by supply glut" as well as uncertainty over Libor transaction risk that "could push CLO spreads a bit wider in Q4 2021."
In a newly published outlook for the CLO and loan market, Voya also summarized second-quarter CLO activity in the marketplace, and projected that triple-A spreads will "widen further" to L+120 bps for top-tier managers in the market.
Mayer Brown adds to banking and finance team
Law firm Mayer Brown has named Elizabeth Hermann Smith as a new Chicago-based partner in the firm’s banking and finance practice. Smith will represent administrative agents, lead arrangers and lenders primarily in syndicated senior secured cash-flow transactions, as well as mezzanine investors and borrowers in leveraged buyouts, according to Mayer Brown.
Smith joins Mayer Brown from Katten Muchin Rosenman.
Mayer Brown also named Brett Moskowitz to the banking and finance practice in the Charlotte, N.C., office, joining the firm from Greenberg Traurig in Atlanta. He will represent clients in bilateral and syndicated loan transactions as well as other financial specialties.
Europe: Cooling-off period
The European CLO market appears to have finally cooled off for August, with the reset of OCP Euro CLO 2020-4 for Onex Credit Partners among the handful of deals to have cleared the market of late.
The €404 million reset and upsize of Onex’s original €251.5 million, one-year non-call pandemic vehicle was notable for its shorter duration, featuring a 1.5-year non-call period and a reinvestment period of under 2.5 years.
The deal priced at 88 bps across the triple-A notes, significantly tighter than recent prints with a longer duration, which have ranged from 93-108 bps since the beginning of July, and was therefore broadly in line with the 87 bps achieved on the late-July €382.5 million reset of Tikehau CLO for Tikehau Capital Europe, which also had a 1.5-year non-call and 2.5-year reinvestment structure.
Indeed, market participants that have spoken to LCD comment that there has been interest of late from certain investors for shorter-duration products; however, this demand is understood to be limited.
Despite activity now slowing down, the volume of deals that cleared the European CLO market in late July and early August has taken some participants by surprise.
Indeed, three new issues, six resets and two refinancings priced during the week commencing Aug. 2, encroaching on a traditionally quieter month for issuance, amid what market participants concur is a difficult market for triple-A notes. The year-to-date European CLO new-issue volume is €21 billion from 52 deals, according to LCD, which is already just €1.1 billion shy of the €22.1 billion total recorded across full-year 2020.
Perhaps keen to avoid a September calendar that sources note is fairly full, managers continued to tap into a CLO market that seemingly remains open for business, despite a lack of clarity over where triple-A pricing is.
Since the beginning of July, €5.9 billion of new-issue European CLO volume has priced from 14 deals, which already roughly matches the July and August tally recorded in 2018, on top of 19 resets and two refinancings as of the end of the week commencing Aug. 9, while two refinancings have cleared the market so far this week.
"There is no strong catalyst to suggest that the post-summer landscape will be a better liability market," commented one CLO manager, while a second noted that they did not currently see any reason why liability spreads would go tighter after the summer.
In the short term, participants expect the European CLO market to be reasonably quiet from here until September, at least on the new-issue front, given the traditional summer break in play for primary loans and a slower secondary loan market that would make for a tricky post-pricing ramp.
However, sources note that situations are likely being worked on in the background ahead of what is anticipated to be a busy September, buoyed by well-ramped warehouses waiting in the wings, 2020-vintage deals that are still waiting to be reset and upsized, and a strong loan pipeline. As for new CLO issues, sources note that while challenged, the arbitrage is still workable, especially considering many managers will have placed equity.
On the demand side, while the triple-A picture remains uncertain — with a handful of larger-ticket accounts still in play, as well as a revolving door of smaller players — sources agree that more investors will likely become interested should pricing drift wider still. "At 105 basis points, bank trading desks are likely to come into play," commented the second manager.