Outlook 2014: U.S. CLO issuance forecast to drop slightly in 2014; European pipeline to climb

By Cristal Cody

Tupelo, Miss., Dec. 31 - The U.S. collateralized loan obligation market is expected to see a strong year in 2014, though not as robust as the about $81 billion priced in 2013, according to informed sources.

Market sources peg 2014's U.S. CLO deal pipeline at about $60 billion with some estimates as high as $70 billion.

European CLO supply is expected to tick up to between €8 billion and €15 billion in 2014 from the €7.8 billion priced in 2013, according to market sources.

"While 2014 will very much be an elevated year as far as post-crisis supply goes, it will be down versus 2013 on a lingering tough arbitrage and as our HY strategy team expects less loan supply after the most active year on record," according to J.P. Morgan Securities LLC research.

A pickup of deals is on deck for the first part of the year, sources said. Market sources reported about $14 billion of CLO transactions in the works in December.

"We expect to see a lot of deals early next year," one informed source said. "Some deals they wanted to get done this year but just never had the chance to do them. We expect to see some better buying activity. People that come next year, the asset classes will be cheaper on a spread basis, and I think people will probably allocate more money to CLOs. We expect some additional demand to be there, which should help stabilize spreads."

Despite a few headwinds that include regulations for U.S. and European CLO markets and wider AAA notes, demand should be strong, sources said.

About $15 billion of CLO issuance per quarter in 2014 is sustainable, according to a Wells Fargo Securities, LLC report from Dave Preston, senior analyst, and Jason McNeilis, associate analyst.

Primary action climbs in 2013

Global CLO issuance of about $86 billion in 2013 set the third-highest annual tally on record, JPMorgan analysts said in a note.

The first quarter saw strong U.S. CLO issuance ahead of the Federal Deposit Insurance Corp. assessment change that took effect on April 1. CLOs issued before the deadline were not counted as 'higher-risk assets' for banks under the FDIC's new stipulation, which made it more expensive for banks to hold AAA tranches, sources said.

Feingold O'Keefe Capital, LLC kicked off the year's issuance in January with the $515 million Longfellow Place CLO 2013-1, Ltd. deal, which priced the AAA slice at Libor plus 145 basis points and the BB tranche at Libor plus 575 bps.

By December, 87 U.S. CLO managers had brought deals in 2013 versus 69 CLO managers in 2012 and 101 CLO managers in 2007, sources said.

Of those, 16 U.S. CLO managers issued three or more CLOs and 30 managers issued two CLOs over the year.

Carlyle a prolific issuer

The Carlyle Group LP was a repeat issuer in the United States and Europe over the year. The global asset manager brought the $623 million Carlyle Global Market Strategies CLO 2013-2 Ltd. deal in March, the $516.9 million Carlyle Global Market Strategies CLO 2013-3, Ltd. offering in June and the $415.21 million Carlyle Global Market Strategies CLO 2013-4, Ltd. transaction in November.

In addition, the Carlyle Group sold the €350 million Carlyle Global Market Strategies Euro CLO 2013-1 BV deal in June, its first European CLO fund since 2008. Carlyle tapped the market again in the fall and priced the €335.9 million Carlyle Global Market Strategies Euro CLO 2013-2, Ltd. deal in September.

"In total, we expect to close more than $3 billion in new issue CLOs for the year," David Rubenstein, co-chief executive officer of the Carlyle Group, said on the company's third quarter earnings conference call on Nov. 6. "We now manage over $17 billion in CLO assets."

CLO primary action was choppy after the first quarter and spreads widened over the summer, sources said. Pricing action improved by the fall, and U.S. CLO issuance surpassed the $54.24 billion sold in 2012, according to market sources.

"Despite all the talk of a lack of AAA investors, regulatory hurdles, and a thin investor base, November 2013 saw greater than $10 billion in issuance," the Wells Fargo analysts said.

Europe's 2013 CLO tally eyed

In Europe, 21 CLO deals totaling €7.8 billion priced over the year.

GSO Capital Partners LP, the credit division of New York-based Blackstone Group LP, sold the largest European CLO in 2013 in early December, according to market sources. The €615.69 million Richmond Park CLO Ltd. deal was upsized from about €414 million. The offering followed GSO Capital's €413.2 million Herbert Park BV CLO deal in August.

NIBC Bank NV finished the year on Dec. 12 with the €306 million North Westerly CLO IV 2013 BV transaction, expected to be the European market's last CLO deal of 2013, sources said.

Totals to expand in Europe

The year's total fell short of some forecasts of as much as €10 billion of European CLO issuance, but sources expect more deals for the coming year and tighter euro spreads.

"Unlike a year ago, we are also constructive on the prospects for the return of significant new issuance in Europe," Morgan Stanley & Co. LLC analysts Vishwanath Tirupattur and Mia Qian said in a 2014 outlook report.

European CLO spreads have come in 10 bps to 125 bps across the structure since early October, according to JPMorgan.

In the year ahead, euro CLO AAA spreads are expected to tighten 10 bps to 15 bps, sources said.

AAAs widen during 2013

U.S. CLO AAA notes tightened to as much as Libor plus 110 bps and then widened to Libor plus 150 bps over the year, sources said.

"Triple As and double As widened since June, while other asset classes have tightened throughout their capital structure," a market source said. "CLO AAAs and AAs have widened since the FDIC assessment charge made banks pull back from the market a little bit. The yield curve is really steep, and that's not helping sell CLO debt, which is based off short-term three-month Libor."

At the start of the year, CLO AAA tranches priced with spreads of Libor plus the 110 bps to 115 bps area, such as the $623 million Carlyle Global Market Strategies CLO 2013-2 transaction in March.

The CLO sold $352.5 million of class A-1 floating-rate notes (/AAA/) at Libor plus 115 bps at the top of the capital structure. At the bottom, the CLO priced $25 million of class E deferrable floating-rate notes (/BB/) at Libor plus 500 bps and $12 million of class F deferrable floating-rate notes (/B/) at Libor plus 540 bps.

In September, the Carlyle Global Market Strategies CLO 2013-4 priced $122 million of class A-1 senior secured floating-rate notes (Aaa) at Libor plus 147 bps. Lower in the structure, the CLO sold $18.5 million of class E senior secured deferrable floating-rate notes at Libor plus 450 bps and $8.5 million of class F senior secured deferrable floating-rate notes at Libor plus 520 bps.

"CLO AAA spreads began to widen in June, driven by two primary factors," the Wells Fargo analysts said. "First, banks worked to understand the effect of CLO purchases under the new FDIC assessment methodology. Second, as the 10-year Treasury rate moved nearly 100 bps higher, fixed-rate assets looked much more attractive from a yield perspective. Some investors focused on fixed-rate assets, and floating-rate spreads widened to keep pace."

AAA notes were holding in late December in the area of Libor plus 150 bps and are expected to be stable the first half of 2014, sources said.

"I can't imagine them cheapening up a lot just because the arb continues to be a problem," one source said.

AAAs flat to tighter in 2014

AAA spreads are expected "to stay pretty much where they are, maybe a little tighter," another source said. "There's really not a catalyst to drive them tighter in 2014 that we see."

AAA spreads could tighten slightly to the 135 bps range in the first quarter of 2014, according to the Wells Fargo report.

"In 2014, we expect AAA CLO spread tightening to lag other assets," the Wells Fargo analysts said. "If primary supply is high and the CLO AAA investor base continues to be limited, it is unlikely that AAA spreads can tighten appreciably, especially given the size of those tranches."

In the mezzanine tranches, BB-rated notes are ending the year in the Libor plus 620 bps to 625 bps area, a market source said.

"They got over 700 [bps] at one point during the summer," the source said.

Mezzanine tranches remain wider on the year and leave some room for tightening, sources said.

"Although lower mezzanine new issue CLO tranches tightened to some extent during the past three months, they still are more than 50 bps wider than their 2013 tights," according to Morgan Stanley.

BBB and BB spreads are more likely to reach the tight levels seen in 2013, the Wells Fargo report said.

"The tightest levels for 2.0 BBB and BB spreads were approximately 350 bps and 550 bps, respectively, in late May 2013," the Wells Fargo analysts said. "We view these levels as realistic floors for mezzanine spreads in 2014, given current forward curve assumptions."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.