CLO volume forecast to slow over summer; new issue spreads tight; secondary active

By Cristal Cody

Tupelo, Miss., June 8 – New issue volume is expected to slow over the summer, market sources said.

“With YTD issuance sitting at just over $50 billion, we make the note that many of the deals issued thus far this year are a result of warehouses opened in 2014,” BofA Merrill Lynch analysts said in a note released on Monday. “In the near-term, we expect new-issue volumes to be constrained by loan supply and the arbitrage.”

Wells Fargo Securities, LLC senior analyst Dave Preston also predicts a slowdown over the rest of June.

“Early June issuance has been strong, with $3.5 billion in issuance,” Preston said. “While the first week’s issuance was strong, and it is likely that May 2015 was unusually low, we do not yet expect a return to the $10 billion + monthly averages posted for most of 2014.”

In the meantime, spreads remain tight in the primary and secondary markets.

New issue CLO AAA spreads have tightened about 20 basis points year to date, and BB spreads are tighter by approximately 100 bps, Preston said.

The basis between AAA and BBB spreads is the tightest since January 2014, he said.

“At this point, we believe that the rally in BB and BBB spreads is likely to pause, with the possibility that mezzanine spreads may actually move wider in June and July,” Preston said. “In three of the past four summers, AAA spreads have widened by at least 15 bps. In the past four summers, single-A through BB spreads are wider or flat.”

Secondary busy

CLO secondary market activity remains strong with BWIC volumes over the previous week nearing $1.2 billion, split between 1.0 and 2.0 deals, according to the BofA Merrill Lynch note.

“The offering in the 2.0 space was concentrated in the mezzanine part of the capital structure while the lion’s share of 1.0 paper carried triple-A original ratings,” the analysts said. “Bidding levels remained overall healthy in the 2.0 space despite the significant spread tightening seen over the past few weeks especially in the mezzanine part of the capital structure.”

In the secondary market, 2.0 CLO AAA notes traded flat at Libor plus 145 bps, about 2 bps better from a month ago, according to BofA Merrill Lynch. BB-rated notes were unchanged at Libor plus 615 bps, about 25 bps tighter on the month.

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