Longer reinvestment periods are returning to both the U.S. and European primary collateralized loan obligation markets, with deal sizes increasing too, as liabilities are more conducive for deal-making than they have been since the pandemic struck. Indeed, in Europe BlackRock Investment Managers set a new tight for the coronavirus period, namely 120 basis points on the triple As, and the manager now holds the tight for the period on both sides of the pond. While it would be wrong to depict that market as in good health, it is certainly looking the best it has, both in primary and secondary, since early March.

Year-to-date CLO new-issue volume, through Sept. 18:

* U.S. — $50.74 billion from 117 deals, versus $85.23 billion from 176 deals in the same period in 2019.
* Europe — €13.21 billion from 40 deals, versus €20.93 billion from 50 deals in the same period in 2019.
* Global — $65.42 billion from 157 deals, versus $108.81 billion from 226 deals in the same period in 2019.

US
CLO issuance is picking up, with a handful of deals in the week ended Sept. 18 pushing activity for the month above both the deal and volume counts for August. That said, issuance is expected to be brisker than the current run rate, with forecasts for a busy preelection period. There are still six weeks to go until then, but with loan issuance gathering pace ($12.3 billion of loans were launched last week versus $10.7 billion the week prior) and the weighted average cost of capital, or WACC, now frequently below 200 basis points, conditions are improving.

This is not just about arbitrage either, as new issues are increasingly looking like pre-COVID deals. Indeed, Morgan Stanley last week priced the first new issue with a five-year reinvestment period since the pandemic hit, the $413 million Wind River 2020-1 CLO for First Eagle Alternative Credit. The manager looks to have paid up a little bit for this, with the triple As at 143 bps, versus BlackRock's tight print for the post-pandemic era of 127 bps. The main triple A tranche for CIFC last week priced at 135 bps (the $15 million slug came at 160 bps), though this was tighter than Sound Point at 147 bps last week (with the smaller tranche at 170 bps).

Meanwhile, new-issue sizes are rising, with BNP Paribas on Sept. 21 pricing the $600 million Antares CLO 2020-1, Ltd., managed by Antares Capital Advisers. That is only the third CLO to come at a $600 million size or higher since the pandemic began. Commenting on the seeming tiering at the triple As, David Preston and the team at Wells Fargo wrote that, "In our view, increased tiering at the AAA level is due to changes in the AAA buyer base. We believe that the current AAA buyer base is now more heavily skewed to money managers than it has been historically; public data shows that banks have reduced CLO holdings in 2020. A buyer base more focused on liquidity is likely to push for a wider spread concession for less liquid names, in our opinion."

Refinancings ahoy?
With liabilities tightening, the prospect of CLO refinancings is tentatively being spoken about again — as in fuller refis rather than the partial ones of fixed-rate tranches that have been seen of late.

Indeed, analysts at J.P. Morgan write that "It may not be obvious to consider refi risk, but AAAs have tightened 272 bps from the wides and a small but rising portion (14%) of the CLOIE AAA index is priced above par. In fact, current market levels for short, secondary paper are now tighter than the range of mid-tier AAA spreads in all of 2019 (and majority [$35bn, or 64%] of likely CLO refi candidates are from the 2019 vintage). The 2020 vintage is also at risk after non-calls given high funding costs in this crisis. … Of the US CLOs that are out of non-call period by April 30th, 2021 (with a >90% current deal factor), $54bn have a AAA coupon currently wide of market levels, spanning 111 CLOs and 69 managers."

This potential trend still seems to be some way into the future, however, and a lot can change before then. In the near-term, the refinancing of Seix Investment Advisors LLC's Mountain View CLO XIV via an applicable margin reset (AMR) auction is scheduled for Sept. 29. KopenTech's AMR auction platform will facilitate the process.

KopenTech's first AMR auction in January 2020 included five broker-dealer participants. For the upcoming Seix auction, the broker-dealer participant list has increased to 13.

Insightful
According to S&P Global Ratings in a piece today entitled, "CLO Insights: More Than 10% Of U.S. CLO Ratings Lowered In Q3; Stabilized O/C Ratios Expected To Slowly Improve Heading Into October," of the 410 reinvesting U.S. broadly syndicated CLOs, 72 have paid down their senior notes by 84 bps, on average, due to interest diversion from failing overcollateralization, or O/C, tests since COVID-19.

Meanwhile, the junior O/C cushion has improved slightly during the third quarter, moving to 1.6%, from 1.4% at the start of the quarter. However, it is still well off the average cushion of 3.8% at the start of March (e.g., 53 CLOs within the ratings agency's CLO Insights 2020 Index continue to fail their junior O/C tests).

Moreover, as of this week, less than 4% of the Index's portfolio exposure is on CreditWatch negative.

Elsewhere, analysts at Morgan Stanley today wrote that "91% of deals are now passing both their ID and OC tests (up from 89% last month). This means that the portfolios that underlie CLOs are continuing to heal."

Europe
Primary triple A spreads on reinvestment CLOs have now tightened to 120 bps in Europe — representing a 25 bps reduction in the space of one month — in a shift which could go some way towards helping to clear the backlog of the 10-15 pre-COVID warehouses understood to still be outstanding.

The €298.7 million BlackRock European CLO X priced on Sept. 17 via Barclays, coming tighter than initial price talk, or IPT, on all but two tranches to set benchmark lows for spreads since the pandemic hit, with a WACC of 194.41.

The deal priced at 120/170/270/380/630/900 bps on the triple-As through single-Bs, setting COVID-period benchmark lows for the triple As, double As, single As and double Bs on a DM basis. The double B tranche firmed the tightest compared to guidance, pricing 20 bps south of the low-end of IPTs. The deal features a one-year non-call period and a three-year reinvestment period.

Barclays also priced the €354.1 million Fair Oaks Loan Funding III, which achieved the second-tightest triple A spread since the onset of the pandemic, at 125 bps. Further down the stack, pricing came in at 185/270/380/650/875 on a DM basis across the double-As to single Bs. In addition, the size of the deal was increased from €348.3 million, following the addition of €2 million of Z class notes and €1 million of M class notes, while the sub tranche was increased from €32.2 million.

On their heels, the €302.6 million CVC Cordatus Loan Fund XVIII launched last week via Deutsche Bank, circulating IPTs that broadly encompass where BlackRock CLO ended up pricing. The new deal from CVC, which is expected to price this week, is offered with a reinvestment period ending on Jan. 29, 2024, joining the likes of Redding Ridge and Five Arrows to push for a slightly longer reinvestment period than the three-year standard seen recently.

Elsewhere, Natixis is marketing the €401.4 million Barings Euro CLO 2020-1 for Barings, which is the largest CLO to be marketed in Europe since the onset of the pandemic, a further sign that deal sizes are creeping up.

Secondary spreads continue to grind tighter. In a research note published today by BofA Securities, analysts observed indicative spread levels of 125/190/250/390/675/975 through the triple As to single Bs. This represents a tightening of five basis points week-on-week across the triple As, double As and single As, as well as a tightening of 10 bps on the triple Bs, 25 bps on double Bs and 50 bps on single Bs, the report said.

While the rapid tightening of liabilities will go some way to help clear the CLO pipeline — one arranger is said to have seven deals to clear — arbitrage remains tricky owing to a rallying secondary loan market, while a lack of loan supply remains the biggest headwind facing new CLO supply.

"Volume going forward is hard to see given where loans are," commented one manager. "If you're not barbelling with lower-priced assets, it's hard to make deals work."

Nevertheless, the signs remain encouraging for new warehouse creation, which is understood to be in the range of 8-10 since the onset of the pandemic, while warehouse terms are expected to soften as competition picks up.

Workout loans
In a further sign that the market is seeing an immediate take-up of documentation flexibility to allow managers to participate in distressed rescue financings, CVC's latest deal is understood to have a "workout loans" clause in the documentation. This allows the manager the flexibility to acquire a loan or bond in connection with, among other scenarios, insolvency, reorganization, default or restructuring in order to mitigate losses.

Take-up of this flexibility has been immediate in Europe following the inclusion of such clauses in the most recent prints for Redding Ridge and GSO. However, while investors are said to welcome such initiatives that protect value, time will tell if the same level of flexibility will be afforded to debut managers with no track record.