There have been some rare sights in European CLO primary market already this year. As Thomas Hopkins reports, there were more refinancings than resets in the first week of deal activity and two deals priced to a 0.5bp degree of precision.
Although, resets have now also begun to gather pace, Invesco kept the refinancing trend going on Thursday with Invesco Euro CLO XII issued in May 2024.
Both M&G and Fair Oaks refinanced the triple-As of their early 2024 new issues at 123.5bp over Euribor the week before. The precision of the pricing there perhaps hints at the intricacy of the play.
As Thomas’ story explains, resets are a far more common option when a deal's non-call period expires. But a particular set of circumstances means the refi looks appealing for a certain crop of 2024 deals.
The structure of a CLO gives managers a lot of different options to manage their deal as it progresses through its life and gives investors a lot of scenarios to prepare for. Underwriting the credits and managers tend to dominate the conversation, but it’s good to have a few deals that put the focus on pricing the options.
Both M&G and Fair Oaks have given themselves a one year non-call, but being a refinancing, no extension to the reinvestment period.
In a sufficiently tightening market, the incentive to reset for cheaper debt will be similar to fresh new issue. They might be extra decisive given they have less reinvestment period to play with.
On the other hand, if spreads are flat or widen, the managers have only a couple of years before they bump into the end of their reinvestment periods resulting in a quicker reset than you might get on a new issue, although as GlobalCapital has reported some managers are even further prolonging the life of their deals.
The pricing of the refinancing itself also influences the incentives. If investors allow the deal to get tighter, it means extra spread tightening is needed to set up a post non-call reset.
In short, there’s much to calculate, down to the last 0.5bp.