Calls for Vintage CLOs forecast to help primary; 2011 CLOs refinance at tighter spreads

By Cristal Cody

Tupelo, Miss., June 10 - Calls for vintage collateralized loan obligations are expected to continue over the summer and may even help increase new issuance, market sources said.

Early 2011 CLOs currently have refinanced at much tighter spreads, sources said.

"To make the CLO equities more attractive, it has become more common to grant the equity holders an option or right to refinance the debt tranches since early 2011," according to a Credit Suisse Securities (USA) LLC research note. "The refinancing option gives the equity holders the right, after the non-call period, to redeem any class of the CLO notes from the refinancing proceeds, at the direction of the majority."

OHA Intrepid Leveraged Loan Fund, Ltd., managed by Oak Hill Advisors, LP, was reported as the first 2011 vintage CLO to refinance its debt tranches in April with a 58-basis-point cut at the triple A level. The fund refinanced its $265 million AAA-rated tranche of senior secured floating-rate notes due 2021 to Libor plus 92 bps from Libor plus 150 bps, according to Credit Suisse and market sources.

The A-rated tranche was refinanced to Libor plus 200 bps from Libor plus 230 bps, while the BBB-rated tranche was refinanced to Libor plus 305 bps from Libor plus 330 bps, the analysts said.

BMI CLO I, managed by BlackRock Financial Management, Inc., recently refinanced its $259 million class A1 senior secured floating-rate notes due 2021 that were priced in 2011 to Libor plus 94 bps from Libor plus 125 bps. BMI also refinanced the $27 million tranche of class A2 senior secured floating-rate notes to Libor plus 145 bps from Libor plus 190 bps, according to the analysts.

Early 2011 CLOs offered a coupon spread of their AAA tranches around 150 bps to 160 bps, compared to current new-issue spreads of about 110 bps to 115 bps for AAA CLO tranches.

The CLOs were able to refinance tighter than current new issue spreads since the issues are closer to the end of the reinvestment period and the average lives are shorter, the analysts said.

The average lives of the AAA-rated tranches of the OHA CLO and the BMI CLO are about 2.5 years and 2.7 years, respectively, while the average life for a newly issued AAA-rated CLO tranche is about 5½ years to 6½ years.

New issuance likely will be created as vintage CLOs are called, market sources said.

"We also expect the increase in CLO redemptions to produce more CLO issuance, as managers look to replace AUM [assets under management] and investors look to fill holes in portfolios," Wells Fargo Securities, LLC analysts said in a note.

The healthy CLO primary market is helping to boost calls, with more than $36 billion in new issuance year to date. More than 24 CLOs have been redeemed in 2013, representing $13 billion in original balance and about $5 billion in outstanding balance, the Wells Fargo analysts said.

"Much of the call upside has now been priced into the more seasoned, post-reinvestment mezzanine tranches," the analysts said. "Investors in CLO 2.0 deals should fully expect those deals to be repriced or refinanced at the call date. Three deals have already undergone refinancing, and it appears at least two deals are in the process of repricing."

In the primary market, Oaktree Capital Management LP has plans to bring a new $655.18 million CLO transaction.

About $16 billion in 36 deals currently are in the pipeline, according to a market source.

More than $15 billion of new CLOs are in the ratings process at Standard & Poor's, the agency said.

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