Approximately $639 million in collateralized loan obligations for PIMCO and Blackrock Financial Management are likely to price this week, and more than $1 billion from three other managers is on the way. But a stocked pipeline may be crimped by a dearth of equity investors and solid assets, spelling doom for many of the dozen or so new CLOs being structured. "Raising equity is very tough if you don't have the experience," said David Hinman, executive v.p. and portfolio manager at PIMCO. "Of the 12 to 14 CLOs in the market, about half won't get done. This is healthy, as it imposes discipline."
Equity has always been the most difficult part of the vehicle to round up, and a lack of good assets in the market has been a problem for managers for the better part of a year. But with more people looking to ramp up CLOs, there is a shakeout coming, said Dan Castro, managing director and head of structured finance research at Merrill Lynch. "As everybody fights for the same collateral, spreads get tighter and it makes the economics of a CLO less worthwhile," noted Castro. "It's a game of musical chairs and not everybody can get a seat." He estimated that "maybe 60-80%" of the CLOs in the pipeline will actually get done.
To be sure, there are still deals plowing through. On top of the PIMCO and Blackrock deals, Franklin Templeton, American Express Asset Management and Bear Stearns Asset Management are close to pricing more than a billion dollars in liabilities. Other managers, however, are altering the structures to complete the deals. Some are said to be structuring transactions to buy small baskets of revolvers on deals in the hope of securing more "B" term loans (LMW, 5/19).
Aladdin Capital Management has downsized its $400 million CLO by $100 million after finding the search for assets too tough in the paper-starved market. Final closing of the vehicle, called Landmark CLO Ltd II, will now be "a lot less difficult," said a portfolio manager familiar with the situation. Pricing on the notes, underwritten by Mizuho Bank and Bank of America, is expected at the end of July. Aladdin officials declined to comment.