The CLO market continues to fire on all cylinders on both sides of the Atlantic, as new issues and an abundance of refinancings and resets jostle for investors' attention.
Year-to-date CLO new-issue volume, through March 1:
* U.S. — $22.43 billion from 45 deals, versus $14.47 billion from 27 deals in the same period in 2020.
* Europe — €4.16 billion from 11 deals, versus €4.61 billion from 11 deals in the same period in 2020.
* Global — $27.46 billion from 56 deals, versus $19.51 billion from 38 deals in the same period in 2020.
Momentum is building in the new issue CLO market, which has all but completely shrugged off the significant challenges of last year. Indeed, February's new-issue volume of $13.8 billion is the highest monthly total since April 2019, and before that June 2018.
The new-issue count of 28, though, was surpassed as recently as last October, which hosted 34, but in a just a few months deal sizes have picked back up to pre-crisis levels, and this is driving the higher volume.
There are plenty of other measures that highlight how the new-issue market's recovery is all but complete, though many of these have been flagged on these pages already this year. Still, the manager count is already up to 39, which is 40% of last year's total. Moreover, deals are now nearly all coming with five-year reinvestment periods.
Most notable, of course, is how liabilities have come screaming tighter this year. Since late January, fresh tights on triple-A notes have been all but weekly occurrences. While a fresh tight was not set last week — L+105 basis points on Apidos CLO XXXV from CVC Credit Partners U.S. CLO Management remains the tightest for a five-year reinvestment period deal — others last week flirted with the tight, namely Carlyle at L+108 bps for its second CLO of the year, and Bain Capital Credit at L+106 bps for its first ticket of 2021.
Bain, in fact, offers a good illustration of the market now versus a year ago, given that it priced its first deal of 2020 on March 3, as the COVID-19 crisis was gathering steam. Its deal last year pays L+119 bps on the triple-As and has a weighted average cost of capital of 187.74 bps. This year's deal pays L+106 bps and has a WACC of 151.87 bps.
Another key factor helping drive the momentum of positive new issue CLO creation is the particularly strong loan supply. Over the 30-day period ended Feb. 24, the total volume of institutional transactions launched to market was $80.4 billion, matching the highest reading on record. Also, the 107 transactions launched over the past 30 days are the most since the period ended March 28, 2018.
At the same time, while loan spreads are declining, they have not tightened as fast as CLO liabilities. Indeed, the all-in spread, including the Libor floor benefit, was L+428 bps for B+/B rated new issue loans last week, up a handful of basis points from the week before. At the end of the first week of January, the same measure was L+485 bps.
Meanwhile, new CLO creation is expected to continue apace, with analysts at Barclays commenting at the end of last week that an estimated 140-150 warehouses are currently open, which is roughly 25% higher year-on-year.
That said, the oscillating 10-year Treasury yield is a potential drag to the market, though the impact is likely to be modest. Analysts at BofA Securities wrote on Feb. 26, "In recent history such significant moves in 10yr yields have caused AAA spreads to move wider by ~20bps during Taper Tantrum. However, 'this time it's different' condition holds … The CLO investor base remains a lot more diversified and we expect bank and money manager demand to remain strong. We thus expect a widening bias, if any, to be modest and spreads to move range-bound in the near term."
The refinancing and reset wave is growing, with 12 vehicles just last week lowering their cost of financing via one such method. Some managers have wasted no time in addressing a deal after it comes out of its non-call period, for example Credit Suisse Asset Management refinancing Madison Park XXXII just over a month after it did so, taking the triple-As down to L+100, from L+120. Others are emerging now after being locked out last year. For example, Neuberger Berman refinanced its CLO 25, which emerged from its non-call period in October 2019, and the triple-As now pay L+93, from L+118.
Meanwhile others continue to extend the life of their deal, typically with a reset having already refinanced the deal a few years prior, with one such example being Invesco RR Fund with its Riserva CLO. The original deal priced in December 2016, with the triple-As paying L+146 bps. It was refinanced in a $552 million deal in June 2019, with the triple-A coupon cut to L+114, and reset last week to L+106.
This works the other way round too, as shown by CVC Credit Partners with Apidos CLO XXIV. The original deal priced in July 2016 with the triple-As paying L+150 bps, before being reset in 2018 to L+112, and last week refinanced to L+95.
The myriad of options for managers, as well as the abundance of older and younger CLOs that are coming into view for a reset of refi means this part of the market is expected to remain strong. Already in the first two months of 2021 the deal counts are high with 46 refinancings (more than half the 85 in all of 2020), and 27 resets (more than the 22 in all of 2020 and just shy of the 33 in all of 2019) have been recorded.
Straight down the middle
Middle market U.S. CLOs can withstand comparable defaults to broadly syndicated loan, or BSL, CLOs with less ratings impact, according to S&P Global Ratings, which conducted stress tests on 65 middle market U.S. CLOs currently within their reinvestment periods.
In a report published on Feb. 26 titled "How Resilient Are Middle-Market CLO Ratings," the rating agency found that middle market CLO structures protected senior CLO note holders, even under the most punitive scenarios modeled.
Similar to the rating agency's BSL CLO rating stress analysis in April 2020, S&P Global Ratings applied five hypothetical stress scenarios to 65 of its rated middle market CLO transactions that are scheduled to reinvest for all of 2021. The first four scenarios featured increasing levels of collateral default stress, with the fourth scenario assuming 30% of the assets default with a 50% recovery. The fifth assumed that all triple-C category obligors default in each CLO (also with a 50% recovery), while all B- rated issuers are downgraded to CCC+.
The analysis found that more than 97% of CLO triple-A tranche ratings either experienced an affirmation or one-notch downgrade to AA+ even under the scenario where 30% of the obligors immediately defaulted, while no tranche rated A or higher defaulted under any of the scenarios modeled.
Europe: Tight fit
With conditions increasingly tight on the asset side, a growing number of market participants expect European CLO new issuance to slow in the short term, with managers that have come to the market thus far having done so at a higher ramp level to allay investor concerns over the current ability to find attractively priced assets.
While pricing at a higher ramp is becoming an increasingly prudent decision for managers, for the last manager to price a new-issue deal, this is nothing new. The €360.45 million Bosphorus CLO VI for Commerzbank AG, via Deutsche Bank, was understood to be almost 100%-ramped at pricing — a strategy that the manager executes for all Bosphorus deals.
For those currently ramping CLOs, one manager commented that there appeared to be a brick wall at 350 bps for B2 credits at present, with CLOs seemingly unwilling to go tighter on a number of deals. However, questions remain over how long this might last, with downward pressure expected to build as more managers drive down their cost of capital on existing deals.
There is, however, opportunity away from loans for those CLO managers that can invest in bonds, with Victoria PLC understood to have attracted a strong CLO bid, given that the bond is secured, double-B rated and offering 3.625%, versus the 300 bps or lower spread seen for double-B rated loans of late.
For now, though, LCD understands that a number of new deals are either currently being shown to investors or are in the works, including the €403.8 million Hayfin Emerald CLO VI for Hayfin Emerald Management, which is being marketed by Goldman Sachs. The transaction is targeted to price late next week (commencing March 8) and is guided at 80 bps area across the triple-A notes.
However, deal flow is already being dominated by refinancings and resets, as evidenced by a flurry of deals last week.
In the week commencing Feb. 22 alone, €2.2 billion from seven refinancings and €3.1 billion from seven resets cleared the market — Alcentra alone contributing three refinancings and one reset — bringing the year-to-date tally for refinancings and resets to €4.7 billion (from 15 deals) and €5.6 billion (from 13 deals), respectively, as at close of business on Feb. 26.
The extent to which liability spreads have tightened has already prompted analysts to revise earlier forecasts for refinancing and reset totals for this year.
In a research note published yesterday (March 1), analysts at BofA Securities updated their forecast to adjust for the spread tightening since the beginning of January and the number of deals coming out of their non-call periods this year. BofA Securities now expects the refinancings and resets total to come in at €30 billion-€40 billion this year, versus its previous forecast of €7 billion-€15 billion.
Looking back across all the action, there were a number of talking points in a week that included further evidence of pricing compression, reinvestment periods pushed out to new frontiers, and two resets that opted for the best of both worlds by pricing almost at refinancing levels, with a shorter reinvestment period.
The current triple-A tight for a refinancing deal was matched last week by Cairn Loan Investments and Alcentra. The €271.85 million refinancing Cairn Euro CLO IV via J.P. Morgan, and the €329 million refinancing of Alcentra's Jubilee CLO 2014-XII via Morgan Stanley, both priced at 60 bps across the triple-A notes, matching the spread on the refinanced BNPP AM Euro CLO 2018 that priced the week prior. The reinvestment period runs off in April 2021 on Cairn's deal, and in October 2021 on Alcentra's deal.
Further evidence that pricing on shorter-dated refinancings is tightening was on display on the €291.4 million partial refinancing of Ares European CLO VI for Ares European Loan Management, via BNP Paribas. The triple-As on that deal, for which the reinvestment period also runs off in April 2021, priced at 61 bps.
The refinancing with the longest reinvestment period left to run last week was the €338 million refinancing of the BlackRock European CLO VII for BlackRock Investment Management. The Deutsche Bank-led deal, which has a reinvestment period that ends July 2023, priced at 62 bps on the upper-most rated notes.
Of the resets that priced, the €415 million reset of Arbour CLO IV for Oaktree Capital Management, via J.P. Morgan, and the €410.2 million reset of Jubilee CLO 2018-XXI for Alcentra, via Citi, both priced with the tightest triple-A spread for a reset with a reinvestment period of four years or more, at 79 bps.
However, two deals — Credit Suisse's €384.9 million reset of Euro-Galaxy III CLO for PineBridge and Jefferies' €479.9 million reset of Dryden 27-R Euro CLO 2017 for PGIM — both managed to lock in triple-A pricing that was more akin to that seen on refinancing deals, by opting for a shorter 2.25-year reinvestment period extension. PineBridge priced at 62 bps across the upper-most rated notes, while PGIM's offering came in at 66 bps.
Of the three resets to price via Jefferies last week, the €430 million reset of Avoca Capital CLO X for KKR Credit Advisors was notable as it included an almost five-year reinvestment period. According to LCD data, there have been just 11 new CLO issues, three resets, and one reissue to come with a five-year reinvestment period in the CLO 2.0 era, and none since late 2019. The deal priced at 83 bps across the triple-As.
While upsizes in resets are expected to feature as a key theme once the shorter-dated, smaller-sized deals that priced last year emerge from their non-call periods, a sizeable upsize was observed on the reset of RRE 1 Loan Management CLO for Redding Ridge Asset Management. The deal, led by Natixis, saw the manager increase the size of the vehicle from €451.8 million previously to €602.54 million and pays 82 bps across the triple-As, with a reinvestment period ending April 2025.
Two European CLO managers last week declared significant hires, the first of which was AlbaCore Capital Group, which announced four recent hires, bringing its total number of appointments since the start of 2020 to 16, and its total headcount to 46.
The most recent addition to the team is Jaime Echevarria from Marathon Asset Management, who joins as director on the investment team. Echevarria is a specialist in European corporate credit with more than eight years' experience.
Alex Walkey also recently joined the team as vice president from Canyon Capital Advisors, along with associates Anastasia Ashcheulova from The Carlyle Group, and Erwan Pincet from EQT Partners. All four will work directly with Bill Ammons, founding partner and portfolio manager, and Deborah Cohen Malka, managing director and deputy portfolio manager.
Albacore priced its debut European CLO in June last year.
Tikehau Capital announced that it has appointed Christoph Zens as head of its CLO business, while also noting that the firm had launched its sixth CLO warehouse.
Zens, who will be based in London, joins the existing CLO team which includes Lorcan Kinsella, portfolio manager and trader, and Elizabeth Ryan, head of CLO transaction management. Zens will assume the role from Debra Anderson, who will retire in the second quarter of the year.
Prior to his new role, Zens spent over a decade at Commerzbank, where he was most recently an investment director within the debt fund management team. In that role, his responsibilities included managing the Bosphorus series of CLOs and private credit funds, as well as sourcing new investments in the European primary and secondary leveraged loan and bond markets.
Since launching its CLO strategy in 2014, Tikehau Capital has completed roughly €2 billion of new issuance across five CLOs, the last of which was the €451.2 million Tikehau CLO V that priced in July 2019.