Collateralized loan obligation managers expect underwriters to retain their deals as the market works to find its footing. The regulatory push for “skin in the game” in securitization and banks looking to put money to work are the two factors driving the retention play. Managers like it, too. Garrison Investment Group’s selection of Deutsche Bank to arrange its $350 million collateralized loan obligation hinged on the bank’s retention of a portion of the AAA-rated paper (TS, 8/4). “Sure, we’ll see more of it,” predicted one CLO manager, speaking to the placement. “We are some way off from fully paced deals.”
The price weakness on AAAs also factors in. “The concept of the arranging investment bank being involved in retaining a slice of the deal, especially senior paper, is not unexpected,” said Russ Morrison, managing director at Babson Capital Management and head of the firm’s high-yield investment group. Banks with greatly improved capital bases are looking to put some of it to work, he said. “Couple it with senior CLO paper being attractive on a credit spread basis to other similar rate securities; it can make solid investment sense for them as a buyer going forward.”
While the market has been bullish on CLO equity (TS, 7/29), AAA paper has recently hit the radar. CLO prices have dropped on most bond classes over the past three months, with AAAs coming in at 91 in July, down from an April’s high at 92, according to a recent Morgan Stanley report. AAs slid to 73, down from 80 in the same period, while single As fell to 65 from 73. That, combined with better quality collateral in CLO replacement pools, has analysts touting the tranches in secondary trading.
Market players are also saying the feature could boost the sector ahead of other asset classes on risk-retention compliance. “They might as well already put skin in the game,” remarked the CLO manager. An official who represents bond buyers agreed. “Regulations are pending for risk retention and having a sponsor’s investment bank that backed the deal or provided a warehouse buying paper gives people comfort.”