--Joy Wiltermuth
Apollo Global Management is planning to raise at least one more collateralized loan obligation this year, with an eye to testing the post-crisis market with at least two primary vehicles annually. "Conditions permitting we think we can bring at least two transactions a year," Joseph Moroney, portfolio manager, said in an interview with TS.
Apollo just priced its most recent CLO, ALM IV, which was increased by $50 million amid demand driven by equity buyers. The deal also saw its $274.5 million AAA paper come in at LIBOR plus 124 basis points, a tightening of 50 bps from its last deal (TS, 10/29/10). Apollo retained the controlling portion of equity in all three transactions issued since the market reboot. ALM IV is expected to settle June 28.
"Spreads on liabilities will continue to tighten. But the big question is what pace?" Moroney said. He isn’t expecting the pace of primary issuance keep up with the last six months, noting the need for a broadened buyer base and a more mature overall recovery to sustain the recent tempo.
Meanwhile, CLO issuers and investors have started to map out a way forward in the existing environment. "Investors are looking for more dialogue on an ongoing basis,” Moroney said. “As a result managers will need to be more transparent." He said both debt and equity buyers want strong management teams and confidence in the underwriter's ability to execute a deal at attractive levels. “They want to know the manager will be there for the long haul."
As for issuers, the market upheaval has swept aside certain vehicle attributes seen at the market peak. “CLO structures are more conservative, with deals that are relatively de-levered versus earlier versions,” he said. “Portfolios are slightly less diverse compared to pre-credit crisis portfolios.” Other things, such as buckets to purchase CLO liabilities and other features that increased manager flexibility have also been stripped out. Moroney said that has helped refocus managers on their core competency of managing bank loans.
But worrying headlines and disparate regulatory regimes in the U.S. and Europe are already a factor. "European sovereign debt and negative macroeconomic news in the U.S. cast a negative shadow over all markets,” Moroney said. “But one of the biggest concerns for the CLO market is the ultimate outcome of risk retention rules."
Rules of the road in Europe on risk retention are already established via article 122a of the E.U.’s Capital Requirements Directive. "That has meant paralysis in Europe," Moroney said. But the final verdict in the U.S. is still a wild card. “It will have somewhat of a negative impact, but could play into the hands of larger players," Moroney said. He predicted a degree of mandated retention for U.S. CLOs. “Consolidation is also a factor, but will have less impact on a manager's ability to bring deals to market. The new [risk retention] rules will give larger managers an advantage.”