The pace of new-issue CLO deals has slowed in the U.S., with six primary-market deals pricing between Oct. 19-25 as managers focused on CLO refinancings and resets.
The European market featured three new-issue pricings and two resets, with triple-As ranging from 96-102 basis points.
Year-to-date issuance, as of Oct. 25:
* U.S. — $144.19 billion from 292 deals, versus $71.37 billion from 166 deals in the same period in 2020.
* Europe — €29.48 billion from 72 deals, versus €17.74 billion from 53 deals in the same period in 2020.
* Global — $179.25 billion from 364 deals, versus $91.39 billion from 219 deals in the same period in 2020.
Among new issues pricing was Blackstone CLO Management's $505.8 million Whetstone Park CLO, the 11th deal for The Blackstone Group this year, which is a record for a manager in a calendar year. The deal initially surfaced in rating agency reports in mid-October, and on Monday, it priced via BNP Paribas with triple-As at a weekly market low of L+112.
Citigroup priced the fourth CLO issued this year by ICG Debt Advisors, the $418.2 million ICG Rhinebeck CLO 2021-4, which includes a class A-1 coupon of L+121.
The $407.6 million Balboa Bay 2021-2 CLO is the second CLO this year for Pacific Investment Management Co. LLC, priced via BofA Securities at a class A-1 spread of L+117. BofA also arranged the pricing of the $407.2 million Anchorage Capital CLO 20, the fifth CLO placed this year by Anchorage Capital Group LLC. Terms on a $170.8 million class A-L loan tranche and a $73.2 million class A-1 notes offering were L+120, according to market sources.
Citigroup priced the $403.3 million Sycamore Tree CLO 2021-1, the debut CLO for Sycamore Tree CLO Advisors LP. Sycamore Tree is the CLO manager affiliate of Dallas-based Sycamore Tree Capital Partners. Last month, the alternative credit firm, founded in November 2020 by former executives of Highland Capital and Onex Credit Partners, announced the hiring of former Onex portfolio manager Paul Travers as managing director and portfolio manager of the CLO platform.
Month-to-date, issuers have sponsored 29 CLOs totaling $13.97 billion. That volume follows the two busiest months of the year, $17.78 billion in September and a CLO 2.0 monthly market record of $19.22 billion in August.
Capital One marks 2021 CLO arranger debut
Another of the new-issuance deals from the prior week was through Capital One Securities, which made a rare appearance in the CLO market in arranging the pricing of a middle-market deal sponsored by Brightwood SPV Advisors LLC, an affiliate of Brightwood Capital Advisors. Terms from the Oct. 20 transaction include a triple-A tranche coupon of L+165 for the $427.85 million Brightwood Capital Fund 2021-2 CLO, according to market sources.
Capital One served as sole structuring and placement agent on the deal, which is slated to close Nov. 4.
Capital One was a co-structuring agent in 2020 for two CLOs: the $263.5 million ABPCI Direct Lending Funds CLO VIII led by Barclays for AB Private Credit Investors and the $300.7 million PennantPark CLO II led by GreensLedge Capital Markets for PennantPark Investment Advisers.
Refinancings/Resets
A dozen U.S. CLO reset or refinancing deals were priced from Oct. 19-25, totaling approximately $5.6 billion and raising the combined volume repriced this year to $207.5 billion.
That total is divided between about $112 billion in resets and $95 billion in refinancing year-to-date. While the combined volume is the largest tally observed since LCD began tracking refinancing/reset deals five years ago, the individual marks are still slightly shy of full year records, at $122 billion in 2018 for resets and $102 billion in 2017 for refinancings.
Among the deals repriced last week, BofA Securities priced the $254 million partial refinancing that lowers the spread on the class A-1 notes of the Elevation CLO 2017-8 for 325 Fillmore LLC, according to sources. Barclays priced both the $461 million reset of the 2019 vintage Sound Point CLO XXIV managed by Sound Point Capital Management and a $483 million upsized reset of Canyon CLO Advisors' Canyon CLO 2019-2.
CLO asset downgrades increase
S&P Global Ratings reported that the number of downgrades in September for corporate loans held in U.S. BSL CLOs increased to the highest total of the year, although downgrades were still outnumbered by upgrades similar to prior months in the year.
In an Oct. 18 report, the rating agency reported that there were 19 downgrades compared to 21 upgrades in September, the closest ratio this year following eight months of higher proportional ratios of upgrades to downgrades.
In August, for example, 28 upgrades to corporate issuers far outweighed nine downgrades, nearly matching July's numbers of 28 upgrades and eight downgrades.
Aquarian Holdings forming new CLO shop with Gallatin
New York-based Aquarian Holdings is partnering with Gallatin Loan Management to form a new syndicated high-yield credit investment platform called Aquarian Credit Partners, or ACP, which will assume management of Gallatin's existing CLO business.
ACP will be headed by Gallatin's leadership team including CEO/portfolio manager Justin Driscoll and COO/portfolio manager Bo Williams. Driscoll will assume the chairman's role at ACP, and Williams will be head of ACP.
Aquarian Holdings, led by founder and managing partner Rudy Sahay, announced the deal Thursday.
According to LCD data, Gallatin Loan Management has issued two CLOs totaling $1.06 billion combined. The firm's last issuance was three years ago with the Gallatin CLO IX 2018-1, which priced via Morgan Stanley.
A press release said the ACP launch "leverages Aquarian's recent growth in asset management and insurance," including the 2018 acquisition of Investors Heritage Life Insurance Co.
"Their expertise in asset management and insurance provides a great platform as we return to the market with expanded product offerings," Gallatin said in a press release.
Aquarian Holdings has assets under management of approximately $2 billion.
Europe: Tightening at the top
European triple-A CLO liability spreads continued to tighten last week with the pricing of the €408.6 million Avoca CLO XXV for KKR Credit Advisors, which broke new ground in the post-summer market, printing at 96 bps. The notes had been guided in the 98 bps area during marketing, while pricing through the floating-rate double-A to single-B notes came in at 175/210/300/625/910 bps on a discount margin basis. On a coupon-only basis, the weighted average cost of capital was 180.5 bps, according to LCD, which ranks as the tightest WACC for a reinvestment vehicle featuring triple-A to single-B notes since early July.
The latest deal is further evidence of the downward pressure being exerted at the top of the CLO stack.
Market participants say the more constructive market for triple-A notes is aided in part by an increase in investors entering the space, particularly those on smaller tickets. "You could expect to see 95-96 bps area at some point," commented one CLO manager away from the transaction prior to its pricing, noting that a number of deals expected to come to market were not originally scheduled.
Indeed, over recent weeks, triple-A CLO notes have tightened from their current market highs — at 105 bps for a new-issue CLO and 108 bps for a reset — while pricing through to the triple-Bs has remained steady, sources comment. "Mezzanine notes have recently been coming in a little bit wider simply due to there not being that many buyers at that level," the same manager added.
"[T]he 96 bps AAA pricing on Avoca CLO XXV has recalibrated Euro CLO new issue pricing,” wrote Conor O'Toole, research analyst at Deutsche Bank, in a note published Oct. 22. "We expect further new issue activity to consolidate around this level and even test tighter pricing."
Coming in wider was the €405.92 million Penta CLO 10 for Partners Group, which priced at 102 bps across the triple-A notes, although triple-As were subject on this deal during marketing. The floating rate double-A to single-B notes priced at 180/230/330/650/940 bps on a discount margin basis, with a coupon-only WACC of 188.7 bps, according to LCD.
"We see the Penta print — AAAs at 102 bps and wider across the stack — more as a reflection of a longer duration deal 2.25yr NC/5yr EoRP (end of reinvestment period) and lower par sub rather than a [bona] fide comparable to market standard. We continue to expect a range of between mid and high 90s on AAAs for end of year, however," O'Toole wrote.
The other new issue was the €409.3 million Harvest CLO XXVII for Investcorp, which priced at 100 bps across the triple-As and 170/215/340/640/930 bps on the floating-rate double-A to single-B notes on a discount margin basis. The WACC on that deal was in line with Partners Group's offering, at 188.39 bps, according to LCD.
Tighter pricing also filtered through to resets, namely the €422.8 million reset of Dunedin Park CLO for Blackstone and the €375.87 million reset of BlackRock's 2020 vehicle, BlackRock European CLO X, which priced with triple-A coupons of 98 bps and 97 bps, respectively.
Blackstone's print came in at 178/225/300/640/940 bps through the floating rate double-A to single-B tranches, on a discount margin basis. The original €409.8 million vehicle had priced in July 2019, with a triple-A coupon of 107 basis points and a WACC of 171 bps. Through the rest of the capital stack, the BlackRock deal came in at 178/210/300/630/930 bps from the double-A through to single-B floating-rate notes, on a discount margin basis.
BlackRock's original €298.67 million vehicle priced in September 2020, with a one-year non-call and three-year reinvestment structure. At the time, the triple-A notes came in at 120 bps, while the weighted average cost of capital of the vehicle was 194 bps, according to LCD.
Excluding static transactions, 22 shorter-dated 2020 CLOs that priced in the wake of the onset of the COVID-19 pandemic have yet to be addressed. The majority of these are either out of their reinvestment periods or will come out of their reinvestment periods this quarter, with a handful running off early in 2022. Nine deals are priced at 115 bps or more at the top of the stack, while 19 have a weighted average cost of capital exceeding 200 bps, according to LCD.
CLO crowding set to continue
CLOs are expected to continue to increase their share of the European leveraged loan market in 2022 at the expense of direct loan investments, according to analysts at Barclays.
"Of what we can quantify, we believe CLOs yet again increased their market share in 2021: the CLO market grew by €16 billion. We believe they increased their allocation to HY bonds from 10.5% to 11%, meaning that the CLO market increase likely caused a €13 billion increase in loan demand," wrote Soren Willemann, head of European credit strategy at Barclays, in a research note.
The report said anecdotal evidence suggests that CLO warehouses have increased versus 2020, while the bank estimates that €5 billion of loans are in CLO warehouses, which is up by €3 billion from 2020. "All in, we estimate CLO investment in loans as having increased by €16 billion to €144 billion, or 54-56% of the loan market, up by about 1% versus 2020," according to Willemann.
The bank expects banks, insurers and retail funds to have maintained a constant, but fairly low, allocation to loans, at about 7%, meaning that asset managers, SMAs and hedge funds have likely decreased their share of the loan market by 1%, the report said.
"But the reality is that there is no quantifiable way of measuring these changes — except that we are reasonably comfortable that CLOs increased their share, and at the expense of 'someone else,'" Willemann wrote. "This relative decrease also fits with our perception that potential direct investors in loans are more lured into direct lending," the report said, which argued that the lower price volatility of direct lending products was more attractive to insurance and pension fund mandates.
However, while the loan market has increased by €25 billion in the year to date, for a total size of €260 billion, Barclays highlights that the growth rate is slowing in spite of record LBO and M&A activity, which the bank attributes to more supply being channeled into the HY space. "[O]n a ratio basis, this is the second year now where the HY market has 'outgrown' the leveraged loan market," Willemann wrote.