The U.S. CLO market finished 2021 with its third-slowest month of issuance for the year, but nevertheless, it capped a record-setting year of primary-market deal activity.
According to LCD data, 21 issuers closed on $10.29 billion in new CLOs in December 2021, the lowest monthly sum since the $10.05 billion issued in July 2021. But the final month's tally built the 2021's cumulative issuance mark to $186.7 billion, well exceeding the prior record of $128.8 billion in 2018. The total more than doubled 2020's $93.5 billion level.
December's deal tally included the final deals that benchmarked CLO securities to the outgoing Libor benchmark. Market observers anticipate the widespread use of the Fed-preferred secured overnight financing rate beginning in 2022 for both CLOs and leveraged loans.
U.S. CLO deals were issued by a record 128 managers in 2021, including the addition of 12 new CLO issuance platforms established in the past year, according to a securitization market research report issued Jan. 4 by Deutsche Bank.
Approximately $3.35 billion of the U.S. December 2021 deals were middle-market CLOs, about half of the volume of broadly syndicated loans during the month.
Europe's CLO sponsors also slowed output from their platforms by printing only three deals totaling €1.21 billion, the lowest total since January 2021. Europe's full-year issuance of €38.62 billion was also a market record, according to LCD data.
In contrast to the U.S. primary market, the $5.81 billion in refinanced CLO issuance across 15 deals was an upturn month over-month from the $5.71 billion in November 2021. For reset deals, approximately $6.08 billion in December 2021 pricings marked the lowest monthly volume in that segment for the year.
Year-end issuance of refinancings and resets totaled a combined $244.7 billion for 2021, the most since LCD began tracking refinancing/reset activity in 2016.
According to banking research reports, the outstanding market of approximately $850 billion in U.S. CLO market vehicles, according to Bank of America estimates, ended 2021 with improved credit and performance metrics compared to 2020.
Barclays also reported that U.S. CLOs saw improvements in weighted-average spreads, an upward notch of 1 basis point month-over-month and 3 bps over the quarter, as well as weighted-average ratings factor levels that declined 331 points since December 2020 to 2,871, reflecting lower exposure to riskier loan assets.
Levels of triple-C asset exposure have also fallen sharply in the past year, as upgrades to underlying loan assets have lowered the percentage of CCC-rated assets (S&P Global/Fitch Ratings) by 3.2% and Caa (Moody's) loan assets by 2.9%, according to Barclays.
Defaulted assets remain near 0%, Deutsche Bank's report noted.
Less than 3% of loan assets in U.S. BSL CLOs and European CLOs are trading below 90% of par, according to Barclays. CLOs' largest exposure to assets trading more than 10% below par includes Envision Healthcare ($1.94 billion, trading at 80.2), Diamond Sports Group ($1.87 billion, trading at 46.1) and Lightstone Generation ($1.3 billion, trading at 84.1).
Primary issuance spreads improved for issuers during the year, Deutsche Bank's research stated, with a tightening of average triple-A coupons to 111 bps over Libor compared to 133 bps a year ago.
Returns on AAA notes totaled 1.3% for the year. Investors in the lower-rated, higher-risk portions of CLO capital stacks were rewarded with returns of between 1.7% (for AAs) and 9.1% for double-B rated notes. The latter included a price appreciation averaging 2.6%, according to Deutsche.