Two new collateralized debt obligations feature triple-A tranche pricing is tighter than the recent market has seen, and that pricing is expected to shrink further as investors increasingly opt to invest in CLOs over other structured vehicles. The triple-A notes for Atrium CDO 1, managed by Credit Suisse Asset Management, and Aurum CLO 1, managed by Stein Roe Farnham, priced at LIBOR plus 43 basis points last week, according to J.P. Morgan analyst Christopher Flanagan. He explained the pricing is due to healthy demand for CLOs accompanied by tight spreads in the underlying collateral markets. The spread over LIBOR is only two basis points lower than what the market had been seeing, but it is significant, buysiders said. "It definitely makes a difference, especially if you are paying a quarterly dividend," one CLO manager said.
The pricing demonstrates the growing appetite for the loan-backed deals, relative to other CDOs, explained Mike McAdams, president and ceo of Four Corners Capital Management. "It is a logical trend for investors who are otherwise stymied by the volatility of other asset classes to move toward where they think risk is the least, and frankly, CLOs have performed far better than CBOs," he stated.
Pricing on triple-As has stayed within the 45 basis points range this year, but has moved inward slightly, Flanagan noted, adding this could continue. "The pricing is not remarkable, but is a good level," said a CDO structurer. "The market is gravitating toward the triple-A deals, driving pricing downwards. Downgrades have predominantly hit bond deals, while loan deals have performed significantly better." In addition to a better track record than the CBOs, "good collateral is difficult to obtain for the bond deals and most new deals are now composed of loans," he added. According to a Banc of America Securities report, the current ratio of loans to bonds is 4.5 to 1 (LMW, 5/5). Aurum, underwritten by Deutsche Bank, is a $400 million cash-flow arbitrage structure composed of high-yield loans. Atrium is a $314 million arbitrage deal, priced by Credit Suisse First Boston.
Aurum comprises a $243 million AAA/Aaa. The $25 million A2/A- spread is 140 over LIBOR; the $14.5 million Baa2/BBB is priced at 240 over LIBOR, while the remaining Ba2/BB is 725 basis points over LIBOR. Atrium is composed of 90% loans and 10% bonds. It consists of a $250 million triple A tranche and is accompanied by a $60 million AA/Aa2 tranche priced at 70 basis points over LIBOR. A $30 million A3/A- offers 140 basis points over LIBOR. The $14 million Baa2/BBB piece is 245 over LIBOR and the $13 million Ba2/BB piece is 735 over LIBOR.
Spreads on BB/BB- leveraged loans have come in from 344 basis points in January to 241 basis points last week, according to the J.P. Morgan data. Spreads on single B names have stayed steady at 375 basis points, only slightly lower than the average for the year.