CLO primary slows, still on target for strong year; AAA spreads hold 25 bps off tights

By Cristal Cody

Tupelo, Miss., Sept. 6 - The CLO market saw light activity over the shortened holiday week, while AAA-rated CLO note spreads remain wider, according to market sources on Friday.

"CLO creation has slowed as AAA spreads remain 25 bps off the tights," Bradley Rogoff, an analyst at Barclays, said in a note on Friday. "We still expect issuance to exceed $65 billion for the year."

Year to date about $54 billion of broadly syndicated and middle-market CLOs have priced, one source said.

About $15 billion of deals are in the pipeline, including transactions from Neuberger Berman Fixed Income LLC, H.I.G. Capital, LLC and Avoca Capital Holdings.

Recent CLOs have priced AAA-rated tranches at the Libor plus 133 basis points to 135 bps area, according to market sources.

American Capital CLO Management, LLC sold the $414.2 million ACAS CLO 2013-2, Ltd. deal in late August with the AAA-rated tranche priced at Libor plus 135 bps and the B-rated notes sold at Libor plus 575 bps.

Triple-A rated CLO tranche spreads have widened to the 140 bps plus Libor area from around the tights seen in May at the 100 bps plus Libor area, sources said.

Although near-term CLO issuance is expected to remain strong, the longer-term outlook is "cloudy, with risk retention rules from the Dodd-Frank Act looming," Rogoff said.

The CLO market likely will be robust into 2016 "as CLO managers are motivated to get as many deals as possible done before risk retention goes into place," Rogoff said.

Market sources expect the Aug. 28 revised proposed risk retention requirement for the Dodd-Frank Wall Street Reform and Consumer Protection Act to significantly curtail issuance and shrink the number of CLO managers.

Risk retention would be based on fair value and requires CLO managers to retain 5% of the CLO balance.

The comment period on the proposed rule expires Oct. 30. The requirement would become effective two years after the final rule is published.

The revised rule provides exceptions for open market CLOs as opposed to balance sheet CLOs, but the exceptions are not likely to matter "as they place an unrealistic burden on banks," Rogoff said. "As a result, we think that whenever the rules go into effect, a substantial proportion of current CLO managers will be shut out of the market if they do not raise significant capital."

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