The new issue CLO machine continues to churn in the U.S., with total year-to-date volume now exceeding $70 billion, from 85 unique managers, according to LCD, while resets of 2020 pandemic deals are increasing.
The European market remains in price discovery mode, however, with sources last week noting that the triple-A bid is currently at the wide-end of the low-to-mid 90s range discussed over recent weeks.
Issuance in 2021, through June 14:
* U.S. — $71.22 billion from 148 deals, versus $31.47 billion from 70 deals in the same period in 2020.
* Europe — €13.24 billion from 33 deals, versus €8.54 billion from 24 deals in the same period in 2020.
* Global — $87.16 billion from 181 deals, versus $40.86 billion from 94 deals in the same period in 2020.
New issues in the week through June 11 priced in a range of 110-122 bps across the triple-As, with the lion’s share pricing in the mid-110 to low-120 bps region. This range has been stable over the past few weeks, and sources comment that the 108 bps achieved on the triple-A notes of Point Au Roche Park CLO for Blackstone in late May was likely a "blip."
Last week’s offerings included the fourth new issue of the year for Redding Ridge Asset Management, which now ranks among eight U.S. managers to have priced four or more deals in 2021, according to LCD data.
The $706.6 million RR 17 CLO priced at 112 bps across the bulk of its triple-A notes, which also included a smaller tranche at 140 bps, while the weighted average cost of capital is 161 bps, according to LCD data. This is only marginally wider than its previous deal, the $599.25 million RR 16 CLO, which priced at the end of April with a triple-A spread of 111 bps and a WACC of 159 bps, according to LCD.
At the other end of the spectrum, Five Arrows priced its first new issue U.S. CLO of the year, the $405.71 million Ocean Trails CLO XI. The deal priced at 122 bps at the top of the stack and at discount margins of 180/250/370/775 bps on the floating rate double-A to double-B notes, for a coupon-only WACC of 181 bps, according to LCD.
Prior to the new issue, the manager’s CLO market activity this year has been focused on two refinancings — a partial refinancing of a 2019 deal, Ocean Trails VII, and the 2016-vintage Ocean Trails CLO VI.
Large deals dominate loan landscape
It is heating up in the leveraged loan primary market, as nearly $16 billion of new institutional supply arrived last week, aided by a few large deals, such as ICON PLC’s $4 billion term loan B and the $2.25 billion LBO deal from Culligan. The roughly $25 billion of volume thus far in June sets the market on pace to best the $35 billion in May, which marked the slowest month of the year.
While LBO and M&A deals have accounted for 68% of that total, some refinancing transactions launched last week as well, for Tivity Health, Signify Health, and MaxLinear, among others. Against the backdrop of a firming secondary market repricings also ticked up, with Pregis, Mannington Mills, Nuvei, ExGen Renewables, and Samsonite International among the entries.
Spotlight on pandemic resets
Reset and refinancing activity remains robust. Ten resets and eight refinancings cleared the market in the week ended June 11, with last week’s haul including three resets of 2020 pandemic deals.
Natixis priced the $359.3 million reset of AIG CLO 2020-1 for AIG Credit Management, pricing at 116 bps across the triple-As, which included a $100 million slice structured in a loan format. The original $332.75 million CLO priced on May 8, 2020, with triple-As notes paying 205 bps.
Goldman Sachs priced the $641.2 million reset of Dryden 86 CLO, a transaction issued last year by PGIM. The reset boosts the original $480 million notional size of the Dryden 86 deal, and priced with triple-As at 110 bps, versus 165 bps, previously.
The largest increase was observed on the $801.1 million reset of the AGL CLO 5, via Mizuho. The reset of the original $600 million vehicle priced at 116 bps across most of the triple-A notes, versus the 205 bps spread on the original deal.
Triple-A spreads on European CLOs last week widened to 90 bps to match the highest level observed for a new-issue European deal in 2021.
The €354.8 million Bridgepoint CLO 2 is the second CLO under the Bridgepoint banner, after the €301.85 million Bridgepoint CLO 1 in November 2020, which followed Bridgepoint's acquisition of Nordic private equity firm EQT's credit business earlier that year.
The latest deal, arranged by Credit Suisse, came in at 90 bps across the triple-A notes, a level that was last observed in January on the €407 million Henley CLO IV for Napier Park. However, pricing came in tight further down the stack when compared to recent prints, with discount margins of 165/200/300/600/890 bps on the floating rate double-A to single-B notes, for a weighted average cost of capital on a coupon-only basis of 176 bps, according to LCD.
As well as ESG eligibility criteria, the deal features "an enhanced level of reporting transparency with respect to the ESG profile of the portfolio" according to a press release published on June 14.
With ESG eligibility criteria — or negative screening — now a staple feature in the European CLO market, attention is increasingly turning to further steps that managers have taken. One such measure is ESG scoring, which some CLO managers have committed to including in their quarterly reporting.
Those deals to have been singled-out in particular for this prior to Bridgepoint CLO 2 have included Neuberger Berman Loan Advisers Euro CLO 1, North Westerly VII for NIBC Bank, and most recently Penta CLO 9 for Partners Group. However, other managers are understood to also carry out or are at least developing this practice, using third-party providers, their own proprietary systems or a mix of both.
Three resets and one refinancing also priced during the week ended June 11, with triple-A spreads on the resets — Dryden 52 Euro CLO 2017 for PGIM, Madison Park Euro Funding IX for CSAM, Avoca CLO XXIV for KKR — at 86 bps, 88 bps and 90 bps, respectively.
The €417.4 million reset of Dryden 52 Euro CLO 2017 for PGIM, which sports the tightest triple-A spread of the three deals, was also notable for its shorter structure, which comprises a 1.5-year non-call and two-year reinvestment period.
Following the busiest quarter on record for new issues, resets and refinancings combined, the cumulative weight of issuance absorbed by the European CLO market has exerted upward pressure on liability spreads, most notably at the top of the capital stack.
As such, market participants note that the market is currently in price discovery mode, with spreads for triple-A notes on new-issue deals over the past month having widened to the mid-to-high 80s, with the market most recently gapping out to a low-to-mid 90s market. Some sources point to early indications that the market is currently at the wide end of this range.
While CLO triple-A spreads remain tight on a historical basis, it remains to be seen what impact further widening would have on issuance going forward, with some CLO resets and refinancings likely to make less economic sense for managers. However, there remains plenty of wood left to chop in regards to resets of less price-sensitive deals dating from 2020, which some believe could crowd-out new CLO issues, while on the new-issue front the asset side is supported by an encouraging loan pipeline.
While the depth of the investor base led to a compression in CLO spreads in the first quarter of 2021, the resulting spike in supply has caused a softening in spreads toward the end of the second quarter, with some investors having stepped back after heavy participation at the start of the year. The glut of CLO resets to come to the market is a major factor, however market participants also point to the relative-value play versus the U.S. CLO product, with sources noting that the U.S. market remains more attractive for those investors who play on both sides of the Atlantic.
"In Europe, if triple-A spreads are in the low-to-mid 80s, even with the floor, it isn’t as attractive as the U.S., where triple-A spreads are in the range of 115-low 120s," commented one CLO manager.
With roughly eight weeks remaining until the traditional late-summer break for CLOs and leveraged finance, some are gearing up for a busy period of issuance in the run-up to that hiatus. Upwards of 50 CLO warehouses are understood to currently be open, and while not all are expected to come to the market this year, many managers have spoken of their confidence in being able to ramp comfortably in the European primary loan market so far, with liability spreads the prevailing factor in terms of timing.
Should spreads widen further, sources note, the impact is likely to play out for the most part on resets and refinancings of pre-2020 vehicles. "If they gap wider, then resets will slow down and the market becomes all about new issues," commented one CLO manager. However, others argue that if spreads were to widen further, then new issues may also take a back-seat.
Regardless of where spreads go, resets of 2020 vehicles are expected to make up a hearty chunk of issuance in the run up to the summer. These deals, which priced last year with a one-year non-call period, are far less price-sensitive given the eye-watering spreads that were locked in following the onset of the pandemic.
Last week’s reset of Avoca CLO XXIV for KKR Credit Advisors was one such deal. The original €339.125 million vehicle priced in April 2020 at 170 bps across the bulk of the triple-A notes (or 195 bps on a discount margin basis), with a weighted average cost of capital of 224 bps, according to LCD. The reset increased the size of the deal to €515.625 million, pricing at 90 bps at the top of the stack, while the non-call and reinvestment periods were pushed out by 1.5 years and 4.5 years, respectively.
"The majority of non-calls end before the end of August this year, so we expect issuance will be heavy from the second part of June and July," concludes another CLO manager. "You could expect new issues to wait as a result."