Quiet week forecast; CLO investment funds emerge; AAA-rated tranches smaller since 2008

By Cristal Cody

Tupelo, Miss., July 1 - New issuance is expected to stay light over the short holiday week, but the summer calendar should stay busy with CLO managers planning to bring $18 billion in 38 deals, according to market sources.

More than $43 billion in 88 deals have priced year to date, one source said.

Offerings from Ares European CLO VI Ltd. and Halcyon Loan Advisors Funding 2013-2 Ltd./ Halcyon Loan Advisors Funding 2013-2 LLC are expected to price early in July, according to market sources.

In recent issuance, Horizon Technology Finance Corp. said on Monday that subsidiary Horizon Funding Trust 2013-1 closed its $90 million offering of 3% fixed-rate notes due May 15, 2018 (A2) that is backed by $189 million of secured loans originated by Horizon. Guggenheim Securities, LLC was the placement agent.

CLO investment funds

CLOs are attracting other investors to the market, sources report.

A new investor base, CLO investment funds, has emerged, Barclays analysts said in a note. Private equity, institutions and business development companies have allocated money to asset managers with structured finance expertise to create the CLO investment funds.

"Similar to other hedge funds, these participants tend to focus on the higher-yielding parts of the CLO capital structure," Barclays said.

Hedge funds had provided liquidity across the capital structure since the financial crisis up until this year, the analysts said.

"However, as CLO 2.0 liabilities repeatedly set new post-crisis tights in [first half of 2013], hedge funds have migrated down the capital structure to focus primarily on lower-rated mezzanine and equity tranches, which still offer sufficient unleveraged return prospects to be appealing to total return investors," Barclays said. "The higher-rated, lower-yielding tranches have moved into the hands of more stable real money accounts."

Deal structure evolves

The deal sizes of tranches over the capital structure have changed since the CLO market reemerged following the 2008 financial crisis, Barclays said in the note.

"The size of a typical AAA-rated tranche has shrunk considerably, from nearly three quarters of total notional during the pre-crisis period to barely more than 60% today," the analysts said. "Since AAA liabilities carry the tightest spreads, the weighted average cost of CLO liabilities is significantly increased by this change."

Tranches in the rest of the capital structure are larger now than pre-crisis deals.

At the end of the capital stack, equity tranches have grown in size as overall leverage to equity holders has fallen from 12 to 13 times at the pre-crisis peak to an average closer to 9 times during the post-crisis period, according to the note.

"The combined effect of smaller AAAs, larger AAs, and mezzanine tranches and a larger equity cushion is that over-collateralization levels for all debt tranches are greater than they were pre-crisis," Barclays said.

© 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.