CLO issuance climbs; $13 billion of deals in pipeline; European secondary CLO spreads firm

By Cristal Cody

Tupelo, Miss., Nov. 22 - Following a batch of new CLO deals from Apollo Credit Management LLC, 3i Debt Management U.S. LLC and PineBridge Investments Europe Ltd. over the past couple of weeks, issuance has climbed to more than $70 billion year to date, market sources said.

About $13 billion in 30 or so deals are in the pipeline, though all may not price before the end of the year, according to market sources on Friday.

"The first half of November has witnessed $3.6 billion of U.S. CLOs coming to market, tracking the steady pace of $6-$7 billion in U.S. CLO issuance exhibited over the past three month[s]," J.P. Morgan Securities LLC analysts said in a note.

European CLO issuance has climbed to more than €6 billion with the €414.75 million CLO that Pramerica Investment Management Ltd. priced earlier in the week, according to market sources.

The Dryden 29 Euro CLO 2013 BV deal included €150.25 million of class A-1A senior secured floating-rate notes (Aaa/AAA/) priced at Euribor plus 140 basis points and €23.25 million of class D mezzanine secured deferrable floating-rate notes (Baa2/BBB/) priced at Euribor plus 380 bps.

Pramerica Investment Management is the London-based leveraged finance arm of Newark, N.J.-based Prudential Financial, Inc.

"The revival in European CLO issuance this year has been steady seeing at least one deal price in every month since April," the JPMorgan analysts said.

Coming up, another CLO transaction expected to price in the European market is NIBC Bank NV's €300 million North Westerly CLO IV offering.

CLO issuance is forecast to stay strong over the coming year, thanks in part to potential risk retention rules that require managers to retain 5% of the CLO balance, which are expected to go into effect in a couple of years, according to Barclays.

"We forecast 2014 loan supply of $340-$360 billion, supported by CLO issuance of $75-$85 billion and rates-driven retail demand," Barclays analysts said in a note on Friday. "In fact, while risk retention poses questions for 2016 and beyond, we believe it could pull forward CLO issuance."

CLO AAA spreads may remain wide relative to other AAA assets because of a lack of liquidity, "but we believe CLO managers will look to grow the consistent stream of management fees that CLOs produce with non-recourse leverage, supporting further issuance next year," the Barclays note said.

Primary AAA spreads remain about 10 bps wider from the beginning of the year, according to JPMorgan.

The rest of the capital structure has tightened over the year, with loan collateral spreads to the three-year maturity tightening 115 bps, the JPMorgan analysts said.

"The secondary CLO market has already reacted to the broader tightening, witnessing strong bids globally in recent weeks, and European secondary spreads have come in 10-35 bps in AAA/AA and 60-80 bps in the BBB/BB over the last month," the analysts said.

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