CLO primary demand strong; refinancing activity to stay busy into 2017; spreads tighten

By Cristal Cody

Eureka Springs, Ark., Aug. 25 – CLO primary demand remains strong in August, while spreads continue to tighten in the secondary market.

GSO/Blackstone Debt Funds Management LLC priced the Jay Park CLO Ltd./Jay Park CLO LLC deal via Citigroup Global Markets Inc., according to a market source. Final pricing details were not available by press time.

“Stronger demand in the market relative to H1 2016 is evident as larger and upsized deals have priced recently; the average deal size issued in January was $413 million, in July, $480 million and in August month-to-date, $455 million,” Wells Fargo Securities LLC analysts said in a note on Thursday.

CLO refinancing activity is expected to stay busy into 2017, according to Moody’s Investors Service.

Refinancing vintage CLOs with step-up tranches has “dominated this year’s CLO refinancing calendar, accounting for ten of the thirteen deals that have, or are in the process of being, refinanced or re-priced,” Moody’s said in its August CLO report released on Thursday. “We expect the trend to continue as thirteen 2013-15 vintage CLOs face a material risk of interest margin erosion because of note coupons that either have already stepped up, or will step up in 2016-17.”

On average, the Aaa spreads for CLOs refinanced in 2016 are 43 basis points below those that would have resulted from the step-ups, with the savings ranging from 22 bps to 61 bps, Moody’s said.

In the secondary market, CLO AAA spreads firmed 5 bps on the month to Libor plus 145 bps, according to the Wells Fargo note.

A-rated tranches have tightened 30 bps from a month ago to Libor plus 260 bps.

CLO BBB- and BB-rated notes were trading 25 bps tighter from a month ago at Libor plus 415 bps and Libor plus 750 bps, respectively, Wells Fargo Securities said.

“Spreads have continued to move tighter in both the secondary and primary market in the second half of August,” the analysts said.

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