CLO spreads stable as loan market holds steady
US CLO debt has held in despite volatile conditions across credit and stock markets, thanks to a steady loan market.
Although loan prices dropped by 13c on Tuesday, the market has weathered volatility in October well wrote JP Morgan analysts on Wednesday, providing returns of -0.06% in the month to date compared with -7.84% in S&P 500 equities, -1.82% in high yield bonds and -1.05% in investment grade corporate bonds.
This relative stability is helping to keep CLO debt spreads in line, despite the volatility.
Historically, secondary CLO spreads have been closely tied to movements in the loan market index. Wells Fargo analysts said on Tuesday that a one point drop in the S&P/LSTA Leveraged Loan Price Index would result in a $3 drop in the BB rated tranche of the Palmer Square CLO index, although the CLO market tends to lag the movement in the loan market by one week, they said.
Only the riskier end of the CLO capital structure widened in secondary trading last week, with double-B bonds and single-B bonds both moving 10bp wider to 610bp and 885bp at the end of last week, according to Bank of America Merrill Lynch data.
Only one new deal has been priced so far this week. PGIM closed a $509.35m deal, Dryden 61, with the triple-A piece priced at 116bp over Libor, at the tight end of the 116bp-127bp range that was seen in the primary market last week. The double-B piece was priced at 540bp and the single-B tranche at 827bp. Credit Suisse was the arranger on the deal, which, like an offering from THL Credit Advisors last week, had a three year non-call period and six year reinvestment period — the longest among deals that have been priced this year.
Two other new CLOs are being marketed this week with price guidance both expected to come within the range of recently priced deals.
Marble Point is marketing its 14th CLO through JP Morgan. The $405.9m deal has a $256m senior triple-A rated tranche with price talk in the 124bp area.
Zais is marketing a $410.3m deal with BAML acting as arranger. Books are subject on the senior triple-A tranche and price guidance has not yet been indicated. The double-B notes have been indicated in the mid-300bp area at a cash price of 99.