A last-minute rush of new deals in the final days of the second quarter of 2021 propelled the U.S. CLO market to a record quarterly primary issuance level.
Issuance in 2021, through July 5:
* U.S. — $84.8 billion from 174 deals, versus $36.7 billion from 83 deals in the same period in 2020.
* Europe — €16.0 billion from 40 deals, versus €10.3 billion from 31 deals in the same period in 2020.
* Global — $104 billion from 214 deals, versus $48.1 billion from 114 deals in the same period in 2020.
US: Another quarter, another record
Eight broadly syndicated and middle-market CLO transactions totaling $3.9 billion were priced in the final three days of the quarter in the U.S., bringing the April-June deal tally to $42.6 billion across 87 transactions and besting the prior mark of $39.8 billion from the first quarter of the year, according to LCD data.
The deals that printed just before the close of second-quarter business included a debut $451.7 million CLO from Diameter Capital Partners via JPMorgan (Diameter Capital CLO 1) as well as the first 2021 deals from Angelo Gordon & Co. (the $406 million Northwoods Capital 25 CLO) and Barings LLC (the $400 million Barings Middle Market CLO Ltd. 2021-1).
Also issued in the frenzied last hours in the second quarter were Rockford Tower Capital Management ($406.5 million Rockford Tower CLO 2021-2), Marble Point ($411 million Marble Point XXII) and BlackRock Financial Management ($506.8 million Magnetite XXXI).
The Carlyle Group continued its heavy churn rate on new deals by pricing its sixth CLO of the year — and third of the quarter — on June 29. The issuance of the $515.75 million Carlyle CLO 2021-6 brings Carlyle's dollar-volume total to $3.158 billion in the year-to-date.
Four deals were reset last week ahead of the end of the second quarter, including three 2020 deals that priced June 30 after completing or nearing expiration of one-year non-calls: AGL CLO Credit Management upsized its AGL CLO 7 transaction to $533.6 million from $501.8 million, while dropping the class A1R triple-A rate to L+120 from L+180; Sound Point Capital narrowed the triple-A spread to L+117 from L+185 in a reset of Sound Point XXVI; and Blackstone reset the $400.79 Cayuga Park CLO at L+112 from L+160.
Carryover momentum
The third quarter is off to a quick start. Five deals were priced July 1, including Wellfleet Credit Partners' $462.05 million Wellfleet CLO 2021-2 (L+120 triple-A spread), Voya Alternative Asset Management's $406.5 million Voya CLO 2021-1 (L+114), First Eagle Alternative Credit's $508.25 million Wind River CLO 2021-3 (L+115), LCM Asset Management's $509.2 million LCM 33 CLO (L+114), and the $509M Octagon 55 CLO (L+114 bps).
Four resets round out the early July activity. The $511.45 million Dryden CLO 68 managed by PGIM Inc. last Thursday was reduced to L+117 from L+131; Credit Suisse Asset Management's $547 million Madison Park Funding 37 resulted in a spread tightening to L+107 from L+133; while CBAM CLO Management repriced its CBAM 2017-3 triple-A notes at L+120, narrowed from the original issuance spread of L+123.
On Friday, Bain Capital Credit priced the $404.55 million reset of Bain Capital Credit CLO 2020-2 — a 2020 pandemic vehicle — pricing at 117 basis points at the top of the stack from 185 bps previously.
Medalist finalizes JMP buyout, takes on ESG mandates
Alternative asset management firm Medalist Partners LP announced it has accelerated a buyout option to obtain JMP Group LLC's minority ownership stake in Medalist Partners Corporate Finance LLC, a CLO platform with $1.2 billion in assets under management.
Medalist, which specializes in asset-based private credit, structured credit and CLOs, had obtained an approximately 50.1% controlling interest in the former JMP Credit Advisors CLO platform two years ago, changing the platform name.
JMP had previously issued five post-crisis CLOs prior to the first deal. Medalist Partners has issued one CLO since the 2019 majority acquisition transaction and plans a seventh CLO deal later this year, the company noted in the release.
Medalist has also announced it will incorporate future screening of environmental, social and governance criteria into its future CLO investments. The formal initiative will include specific guidelines that will be factored into the investment process of Medalist's CLO platform.
Executive moves
First Eagle Alternative Credit LLC ($16 billion AUM across 35 BSL and middle-market CLOs) named CLO industry veteran Nishil Mehta as managing director and product specialist on its tradable credit team to help expand First Eagle's CLO debt and equity strategy. Mehta joins First Eagle after more than 10 years as a CLO portfolio manager for Prospect Capital Management LP.
Jefferies Financial Group also announced that former Crescent Capital Group managing director Melissa Weiler has joined its board as an independent director. Weiler oversaw the CLO business for Los Angeles-based Crescent before her retirement last December.
Europe
The first half of 2021 closed out last week with new issue volume at €15.1 billion from 38 deals. While this eclipses the €10.1 billion from 30 deals that priced during the pandemic-disrupted market of 2020's first half, this year's tally sits broadly in line with the first half of 2019, which featured €14.72 billion from 35 new-issue deals.
By the end of the week, year-to-date European CLO new-issue supply had reached €16 billion from 40 new-issue prints, while some analysts predict at least €10 billion of further issuance before year-end.
Indeed, on July 5, analysts at BofA Securities raised their forecast for new issue supply from €24 billion to €27 billion. "We believe that levels of both leveraged loan issuance and CLO equity arbitrage will remain supportive in 2H21. At present we estimate that as many as 50 warehouses can be open," the research note said.
In another similarity to the pre-pandemic market, four European CLO managers — KKR, Spire Partners, Palmer Square and Blackstone — have now priced two deals so far in 2021, matching the tally of managers to have printed two deals by this point in 2019. The latest to do so was Blackstone, which last week priced the €404 million Rockfield Park CLO.
Pricing-wise, at the top of the stack, Blackstone's latest offering comes in at the tight end of the low-to-mid 90s bid that recent new issues have been attracting.
The triple-A notes priced at 90 bps, while the floating-rate double-A to single-B notes came in at 150/200/300/610/900 bps on a discount margin basis, for a coupon-only weighted average cost of capital of 173.64 bps, according to LCD.
The two other new issue deals to price last week — the €425.15 million CIFC European Funding CLO IV and the €457.3 million Contego CLO IX for Five Arrows Managers — both came in at 95 bps across the top of the stack.
CIFC Asset Management's latest offering priced at 150/210/310/610/890 bps from the double-A to single-B floating rate notes on a discount margin basis.
Five Arrows' latest deal — its first since July 2020 — priced at 160/215/300/615/910 bps from the double-A to single-B notes on a discount margin basis, with a WACC of 181 bps, according to LCD.
Market snapshot
While triple-As on new-issue prints continue to price in a low-to-mid 90s context, there was evidence of further widening in the €373 million reset of Toro European CLO 3 for Chenavari Credit Partners, which priced at 99 bps across the triple-A notes, while there remains an expectation that further widening is likely.
"I wouldn't be surprised if triple-A pricing widens a bit more in the next couple of months," commented one CLO manager last week, who nevertheless expected liability spreads to stabilize in the second half of the year.
This stabilization, they argued, was supported by strong demand from European investors, including new entrants to the market, and the prospect that Japanese investors, who have largely been on the sidelines, might enter the market as the year progresses. "Japanese investors were expected to come in April or May, but we haven't seen many; however, I sense more will come back in the second half of the year," added the same manager.
Knowing the score
CLO managers that have spoken to LCD over the course of the year have stressed the increasing emphasis that both investors and managers alike are placing on ESG criteria which, anecdotally, sources say now takes up a considerable chunk of time during investor meetings.
However, thus far there has been little evidence to suggest that the strength of ESG-related eligibility criteria — now considered market standard — or the publishing of internal ESG scoring has had a tangible impact on demand during the marketing process.
Analysts at Barclays expect this to change, however, as investors' ESG requirements grow. "We think investors who place increased emphasis on ESG incorporation are likely to find managers who utilize internal scores more appealing, rather than those who simply just screen out specific industries," the bank's analysts wrote in a research note published July 2.
"And while CLO liability execution levels for deals that are more ESG friendly are similar to those with not as strict ESG investment criteria currently, this could easily change as ESG adoption by investors increases further. Additionally, CLO equity investors who adopt more strict internal ESG policies could be more willing to provide capital to managers who are leading the way for proactively incorporating ESG into their investment process versus those managers who choose to utilize looser, more market standard restrictions," the report adds.