CLO issuance surged last week as managers jumped through the final window ahead of this week's U.S. presidential election. This led to the largest monthly new-issue volume totals of the year in October in both Europe and the U.S. In rushing to market last week, CLO managers once again highlighted that there is clear manager tiering at the top of the liability stacks based largely on the number of outstanding vehicles, while five-year reinvestment periods made a resurgence in the U.S.
Year-to-date collateralized loan obligation new-issue volume, through Oct. 30:
* U.S. — $73.11 billion from 171 deals, versus $101.26 billion from 209 deals in the same period in 2019.
* Europe — €18.73 billion from 56 deals, versus €26.17 billion from 63 deals in the same period in 2019.
* Global — $94.29 billion from 227 deals, versus $130.58 billion from 272 deals in the same period in 2019.
U.S.
There was plenty of primary issuance last week, with ten new issues pricing (nine broadly syndicated loan CLOs and one mid-market deal), ensuring that October recorded the largest monthly total of the year at $12.7 billion.
Much of last week’s surge was driven by a desire to access the market ahead of this week’s election, with concerns rising that a clear victor may not emerge right away, which in turn could lead to a spike in volatility across markets. That said, new issuance has been strong since the start of September, with both September and October registering double-digit monthly volumes, the first time this has been achieved for two consecutive months since March/April 2019.
Contained liabilities costs allied to a resurgent primary loan market and a deep secondary market have combined to allow pent-up issuance from less frequent issuers to emerge, while more prolific issuers have been able to ramp up activity.
Indeed, Credit Suisse Asset Management LLC, which in 2018 and 2019 combined issued 23 deals, got away its third of 2020 last week, with all three pricing since mid-June. The latest new issue sports a weighted average cost of capital of 191.59 bps, according to LCD, while the other two this year were both just inside 217 bps.
Likewise, Carlyle CLO Management L.L.C. priced its second deal of the year last week, with its first emerging in July. This compares to five in 2019, four in 2018 and five in 2017.
At the other end of the spectrum is Ab Broadly Syndicated Loan Manager LLC (AllianceBernstein), which priced its debut BSL CLO, having announced a year ago that it had established such a platform.
As a point of comparison on financing costs, both AB and Carlyle opted for non-call one-year with a three-year reinvestment period for their deals. The debut manager is paying L+150 on its senior triple-As and 1.878% on a small ($2 million) tranche, while Carlyle is paying L+132 for its senior triple-As and 1.704% for the smaller ($62 million) fixed-rate triple-A tranche.
Indeed, manager tiering at the top of the stack for those with a longer track record versus newer managers has been clear to see in recent months; LCD examined this last week in a piece entitled, "Quick take: Manager tiering increasingly evident in US CLO triple-A pricing."
Once I caught a fish alive ...
A more nascent trend that really gathered pace last week was the emergence of more deals with a five-year reinvestment period. Up until last week, there had been just two such deals issued since mid-March, whereas last week there were six.
For many, this is yet further evidence that the market is returning to more pre-pandemic-type structures. Moreover, for some managers this is a welcome development, giving them longer runways on which to manage their deals.
For others, though, it is not a straightforward decision, with some commenting that the market is broadly at 130 bps for triple-As that are non-call one/three-year reinvestment, versus the low 140 bps region for non-call two/five-year reinvestment. The question for some, then, is, do they want the lower costs and the chance to reset the deal sooner should there by a market rally, or to be locked into liability costs for longer but have the greater certainty over their flexibility to manage their deal.
Out with the old, in with the new
As we get closer to Libor calculations ceasing to be submitted and thus the end of the rate being used in the loan and CLO markets, the LSTA on Nov. 2 released a statement announcing the publication of the final form of its new LIBOR Replacement Provisions for Amendment of CLO Indenture, which was unchanged from the draft of the document released Oct. 2, which includes operative Libor replacement provisions, template language for a modification of the indenture, and sample exculpation clauses for trustees and managers.
"The purpose of the operative Libor replacement provisions and accompanying form of supplemental indenture is to provide a template for CLO investors and transaction parties to use in connection with a CLO transaction that does not already contain provisions to effect the transition or fallback from Libor to a non-Libor benchmark rate upon the occurrence of certain Libor transition events," the LSTA stated.
Meanwhile, David Preston and the analyst team at Wells Fargo last week put out a piece entitled "CLO Libor Update: Step Into the LIBORatory," which offered an update on Libor fallback language in CLOs and loans. Wells Fargo noted that, per a sampling of syndicated institutional loans originated or amended from August 2017-September 2020 surveyed by Covenant Review, less than 1% of these loans had ARRC (Alternative Reference Rates Committee, a working group organized by the Federal Reserve)-recommended hardwired language. This means more than 99% of the loan sample will need to be amended to choose a Libor replacement.
Furthermore, in early October, S&P Global Ratings published a report entitled “As The Deadline For The Transition From LIBOR Approaches, Work Remains For U.S. Structured Finance.” The report highlights that close to 20% of the CLOs reviewed by S&P contained ARRC language.
Europe
With a backlog of primary deals now cleared, new European CLO issuance is expected to remain off the boil until further clarity about this week's U.S. presidential election emerges.
The pace of supply witnessed in recent weeks has resulted in October being the busiest month in the European CLO market this year, with €4 billion from 12 deals priced. What’s more, almost half this supply — €1.9 billion from six deals — has priced since Oct. 22.
The benchmark low for triple-A spreads post-pandemic remains at 110 bps, with eight deals now having printed at that level since the end of September.
Three deals got over the line last week after launching into a crowded market, including Sound Point's €340.2 million Euro CLO IV, which sported the longest reinvestment period for a 110 bps triple-A print since the pandemic hit, at 3.5 years (ending July 2024). Pricing on that deal, which was led by Citi, firmed inside of guidance across the stack, at 110/180/290/450/735/965 bps from the triple-As to single-Bs (on a DM basis). The transaction was the manager's second European deal of the year and fourth European CLO overall.
Hayfin Emerald Management's €345.6 million Hayfin Emerald CLO V also priced at 110 bps across the senior-most notes in a Goldman Sachs-led transaction. However, pricing further down the stack came in wider than initial guidance at 185/300/450/775 bps on the double-As to double-Bs, versus 170-180/265-275/400-425/725-750 as originally outlined. The indicative structure of the deal had included €3.9 million of single-B notes that did not feature in the final priced structure.
Voya Alternative Asset Management became the third manager this month to price at 115 bps across the triple-A notes. The J.P. Morgan-led €253 million Voya Euro CLO IV DAC came in at 115/195/270/425/725/960 bps across the triple-As through single Bs, versus IPTs of 110 area/170-180/270-280/400-425/M700s/L-M 900s.
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Crocodile tiers
Given that manager tiering has yet to demonstrably filter through to triple-A spreads in Europe, one manager away from the current crop of deals speculated that the recent prints at 115 bps were likely due to the supply/demand dynamic, rather than manager performance or the quality of their portfolios. A second manager suggested that some managers were able to lock in at 110 bps with anchor investors, prior to the market softening.
However, there remains a greater argument for tiering lower down the stack, where more variance has been observed in recent weeks. "The whole market is finding double-As quite challenging," commented the second manager.
"There was pent-up demand a few weeks ago, but we've had a bunch of new issuance, and volatility makes it a bit tougher now," said a third CLO manager, adding that most deals to price recently have had at least one tranche that was difficult to place, especially lower down the stack.
For example, Hayfin axed its single-B tranche at final pricing, and instead the equity was increased to €35 million, from €27.20 million.
Moreover, triple-Bs on recent prints have come in wider than those priced in previous weeks. For example, the triple-B notes on Hayfin and Sound Point both came at 450 bps, matching the triple-B spread on Sculptor European CLO VII last week — versus lows of 350 bps in September and average triple-B pricing of around 420 bps in October. The last time a triple-B print came at 450 bps or above was July.
In addition, Palmer Square's second static European CLO, which priced on Oct. 23 at 87 bps across the triple-As, firmed at 435 bps across the triple-B notes, which is also higher than most triple-B spreads seen in recent reinvestment CLOs. This, commented the first manager, could be attributed to a lack of buyers at that level towards the end of the month after certain continental European investors pulled away.
Analysts note that investors have become somewhat more cautious. In a research note published by Deutsche Bank on Oct. 30, analysts suggested that sentiment may have been fading lately. "While the pace of supply in recent weeks has pressured lower mezz spreads wider in secondary, news of fresh lockdowns in Europe due to second wave COVID outbreaks, and some risk being taken off the table with U.S. elections in near-term view are also impacting," the bank’s analysts wrote.
"This may have resulted in the single-B tranche in HAYEM 5X (Hayfin) being dropped at pricing, and the BBB/BB at 450/775 bps DM, wider versus 425/725 bps in VOYE 4X (Voya) earlier in the week," added the report.
Nevertheless, the market remains favorable for new issuance, with deal flow expected to pick up following the election week. One estimate last week puts the expected deal count at between five and seven CLOs in November.