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Pricing on junior mezzanine notes is diverging as managers have to cope with difficult conditions
Manager extends non-call by a year, tapping into market for shorter-dated deals
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PGIM’s Ronni Neeman, vice-president, structured products, said that his institution was pushing CLO managers to put firmer terms on replacing Libor in their deal documents, cutting down on manager discretion — which could be used to lock in low fixed interest rates if the benchmark is no longer published after 2021. -
The Loan Syndication & Trading Association’s win over federal regulators exempting CLO managers from risk retention could be just the beginning for the loosening of regulatory reform, said market pros speaking at the SFIG Vegas conference on Monday.
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The capital markets industry is only just beginning to assess its exposure to the phase-out of Libor, expected at the end of 2021, and there isn’t an ideal replacement benchmark. In fact, there might not be by the time banks stop being compelled to make Libor submissions by the UK’s Financial Conduct Authority.
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The District of Columbia Court of Appeals ruled on February 9 that CLO managers should be exempt from risk retention rules, a move that will make the business less capital intensive and could spur an increase in smaller managers. But with loans still trading tight, despite volatility spiking elsewhere in credit markets, finding collateral is still the biggest challenge in the market.
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Morgan Stanley analysts described the potential rollback of risk retention rules for US CLO managers as a “modest positive” for the market on Tuesday, adding $10bn to their 2018 issuance forecast, but they warned that credit quality could suffer in new deals because of the scarcity of leveraged loans.
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Premier Oil’s restructuring last year was a test for the risk transfer market, as the different synthetic securitizations exposed to the troubled firm reacted very differently. The European Banking Authority wants to see a tougher approach and more consistency in the market, which could hurt some firms’ ability to transfer risk.
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First time issuers are dominating activity in the growing market for commercial real estate CLOs, with Bridge Debt Strategies the latest debut real estate investment trust to tap the market.
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Shares in US CLO manager Marble Point’s listed loan fund were admitted to the London Stock Exchange on Tuesday, after the firm successfully closed a $42.5m initial public offering on Friday.
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US high yield bonds have been jittery in recent days but the loan market has largely held firm, with few opportunities for CLO managers to buy assets on the cheap. The riskiest pieces of CLO debt have shown some vulnerability to market pressures, however.
