Middle market CLOs pricing wider than broadly syndicated deals; Mountain Hawk II CLO prices

By Cristal Cody

Tupelo, Miss., May 28 - Triple A rated tranches in middle market collateralized loan obligation transactions are pricing as much as 50 basis points wider than broadly syndicated loan CLOs, according to market sources.

"In general, middle-market CLO AAA tranches have priced 25 bps-50 bps wider than BSL CLOs," Dave Preston, senior analyst at Wells Fargo Securities, LLC said in a note.

"When comparing collateral pools, middle-market CLO investors are exposed to collateral approximately one notch lower in rating, but the assets pay 150 bps extra in spread," he said.

"Compared to broadly syndicated loan CLOs, middle-market CLOs offer greater levels of subordination, more excess spread, higher yields, but may be less liquid."

A diverse group of middle-market CLO issuers has emerged as the market picked up steam this year, sources said.

Investors should stick with established middle-market CLO issuers with proven track records even if the deals price at tighter spreads, Preston said.

Six middle-market CLOs totaling $1.8 billion have priced through May. In 2012, $4.2 billion of middle-market CLOs priced.

"Just as the BSL loan primary market has been dominated by refinancing activity, the middle market sector has not seen a pickup in new money as a percentage of issuance," Preston said.

"Despite the lack of new money in the market, middle-market spreads have not tightened as much as broadly syndicated loan spreads."

Middle-market loan spreads have tightened by 135 bps since widening in June 2012, while broadly syndicated loan spreads have tightened by 200 bps to 250 bps over the same period, he said.

On average, "middle-market loan spreads are still in the 600 bps range, which matches the median WAC of 2.0 middle-market CLO portfolios," Preston said.

In new CLO issuance, Mountain Hawk II CLO Ltd./Mountain Hawk II CLO LLC raised $518.05 million, a market source said.

Mountain Hawk II CLO sells

The deal from Mountain Hawk II CLO included $518.05 million of notes due July 20, 2025, according to a market source.

The CLO sold $270.5 million of its AAA-rated tranche of notes at Libor plus 116 bps.

The offering also included $21 million of BB-rated notes priced at Libor plus 490 bps.

Deutsche Bank Inc. arranged the transaction.

Pasadena, Calif.-based fixed income manager Western Asset Management Co. will manage the CLO, which is backed by a revolving pool of broadly syndicated first-lien senior secured loans.

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