CLO spreads have room to tighten; Cent CLO 18 prices; Blackstone/GSO eyes Europe deal

By Cristal Cody

Tupelo, Miss., May 15 - CLO liability spreads still have room to tighten, Michael Kessler, a credit strategist at Barclays, said on Wednesday.

"We're getting close to the psychologically important threshold of CLO triple A's at Libor plus 100 [bps]," he said. "By comparison, CMBS triple As are now at Libor plus 75-80 [bps] on average. CLO liabilities tend to offer more yield than just about any comparably rated asset."

But the most pressing issue facing the CLO market is the "huge divide between supply and demand in the leveraged loan market," Kessler said.

More demand than supply is "not actually a good thing" in this case, since coupon rates are likely to continue to deteriorate, he said.

"The two main sources of demand are CLOs themselves and mutual funds," he said. "Between the two, they hold about two-thirds of the loan market."

Several new CLO deals have priced in May, including Columbia Management Investment Advisors, LLC's Cent CLO 18 Ltd./Cent CLO 18 Corp., which sold $527.5 million of notes due July 2025. The firm's $315 million triple A-rated slice priced at Libor plus 112 basis points, according to market sources on Wednesday.

Columbia "got a really tight double B print and a pretty good triple A print too," one source said.

Coming up in new offerings, GSO Capital Partners LP is expected to bring its first CLO in Europe since 2008, according to market sources.

Leveraged loans are "competitive at this point with the high-yield bond market from a yield perspective," according to Kessler. "They also have better security, lower volatility, and most importantly, more favorable exposure to any eventual rise in interest rates."

Over the year, older CLOs are expected to be called to take advantage of lower liability spreads.

"We will continue to see some of the early CLO 2.0 deals getting refinanced as they exit their non-call periods and managers struggle with tighter collateral spreads," Kessler said.

Another area of note developing in the CLO market is that 91% of first-lien term loans printed in April included Libor floors, the lowest monthly figure since Libor floors gained wide acceptance in early 2011, according to Barclays.

"It's something we're going to keep an eye on," Kessler said. "It won't materially change our view on CLOs' asymmetric exposure to changes in short-term interest rates unless that number goes significantly lower."

Columbia prices

Cent CLO 18 sold $527.5 million of notes due July 2025 in a CLO, according to market sources on Wednesday.

In the deal, Cent priced $3.75 million of class X floating-rate notes (Aaa) at Libor plus 100 basis points; $315 million of class A floating-rate notes (Aaa) at Libor plus 112 bps; $55.5 million of class B-1 deferrable floating-rate notes at Libor plus 155 bps; $10 million of 3.12% class B-2 fixed-rate notes; $31.25 million of class C-1 deferrable floating-rate notes at Libor plus 252 bps; $2 million of 4.05% class C-2 fixed-rate notes; $25 million of class D deferrable floating-rate notes at Libor plus 345 bps; $26.25 million of class E deferrable floating-rate notes at Libor plus 460 bps; and $53.75 million of subordinated notes.

The offering also consisted of a $5 million tranche of class P securities (Aaa), which included Treasuries with a 0% coupon due May 2025 and subordinated notes.

Morgan Stanley & Co. LLC was the underwriter.

Columbia Management Investment Advisors will manage the cash-flow CLO, which is collateralized primarily by broadly syndicated first-lien senior secured corporate loans.

The investment management firm is based in Boston.

Blackstone/GSO on tap

The €403.35 million of notes due 2026 from GSO Capital Partners, the credit arm of the Blackstone Group LP, is expected to price for the firm's first CLO in Europe since 2008, according to market sources.

In the offering from GSO, Grand Harbour I BV plans to sell €240 million of class A-1 senior secured floating-rate notes (/AAA/AAA); €15 million of class A-2 floating-rate notes (/AA/); €35 million of class B floating-rate notes (/A/); €22.5 million of class C floating-rate notes (/BBB/); €32.5 million of class D floating-rate notes (/BB/); €10 million of class E floating-rate notes (/B/); and €48.35 million of subordinated notes.

Citigroup Inc. is the placement agent.

Blackstone/GSO Debt Funds Management Europe Ltd., a subsidiary of GSO Capital Partners, will manage the CLO, which is backed by a revolving pool of euro-denominated senior secured loans and bonds.

Proceeds from the deal will be used to purchase a €400 million portfolio of European leveraged loans and bonds.

New York-based GSO Capital Partners is an alternative asset management firm.

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