Copying and distributing are prohibited without permission of the publisher.


New CLOs drive market, investors focused on riskier bonds

By David Bell
15 May 2018

A handful of new US CLOs are expected to be priced this week, including deals from HPS, Voya and Octagon, as traders say that investors are looking to take advantage of tightening spreads in junior CLO debt.

Four new CLOs were priced last week, and this week could see similar volume of new deals.

On Monday, Octagon Investment Partners released price guidance for its latest deal, arranged by Credit Suisse. Voya Alternative Asset Management also announced a new deal via Morgan Stanley, and HPS Investment Partners is also expected soon to price a $510.55m deal through Bank of America Merrill Lynch.

Spreads in new issue deals have tightened in recent weeks after widening in April, with traders saying that investors are most focused on the rally in junior CLO debt.

“We’re seeing the most interest in double-B paper,” said one CLO trader. “Particularly stuff that was printed in late 2017 and early 2018, which widened out in April. The new issue market has slowed somewhat and prints are getting better,” he said.

The pricing of some of the new deals last week has helped drive the secondary market tighter, he said.

CVC Credit Partners’ Apidos CLO XXIX, which was priced last Friday, included a double-B tranche that was priced at 525bp over three month Libor. Double-B paper had widened out to the high 500bp-600bp area last month, the trader said.

Spreads at the top of the capital stack have also tightened. Bank of America Merrill Lynch analysts said generic triple-A spreads were around 100bp in the secondary market at the end of last week, 2bp tighter than the week before.

Last week, new issue triple-A spreads ranged from 103bp in PGIM’s Dryden 55 Senior Loan Fund to 116bp in a debut deal from CarVal CLO Management. The triple-A notes in Octagon’s latest deal are already subject at 102bp.

A second trader also said that demand was strongest at the junior end of the capital structure, and added that there was increased demand from short dated credit funds in the CLO market, targeting the short exposures in refinancing deals.

New deals account for more activity in the CLO market compared with last year, according to JP Morgan. Total CLO volumes, including new issue, refi and reset deals, is broadly similar at around $100bn, they wrote on Monday. But refi and reset deals account for only 42% of that volume this year, compared with 72% last year.

However, the passing of the deadline last week for the US government to repeal the district court’s decision to overturn risk retention could spur more reset activity. Previously, some managers held off from resetting deals because they were required to stump up risk retention capital. Without the rule in place, resets may become a more attractive option, particularly given the scarcity of loan collateral for new deals.

By David Bell
15 May 2018