BlackRock brings Magnetite CLO; Ares to price shorter-duration CLO; market eyes tighter spreads

By Rebecca Melvin

New York, April 25 - BlackRock Financial Management Inc. priced $612.4 million of notes due April 2026 in the Magnetite VIII Ltd./Magnetite VIII LLC collateralized loan obligation, according to an informed source Friday.

The CLO has $367.5 million of class A floating-rate notes (rated Aaa), with an spread of Libor plus 148 basis points at the top of the deal structure.

Ares Management LLC was expected to price imminently $360.75 million of notes due 2024 in a collateralized loan obligation under Rule 144A, according to an informed source.

The Ares CLO includes $240 million of class A floating-rate notes (rated Aaa), with a coupon of Libor plus 85 basis points at the top of the deal structure, and a discount margin of 110 bps.

The Ares and Palmer Square CLO 2014-1 transactions announced within the past week are notable in that they attract AAA investors with shorter duration baskets. The shorter-duration transactions allow for tighter spreads in the range of Libor plus 110 basis points to Libor plus 130 bps versus recent prints of 150 bps to 155 bps in longer duration deals.

Tighter AAA spreads combined with a reduction in management fees will improve the arbitrage for CLO equity investors looking to put capital to work now instead of waiting on the sidelines for further spread tightening, ORIX America's Jason Ziegler told Prospect News.

"The shorter-duration transactions could lure banks back into the CLO AAA market, and since bank participation within AAAs has dropped by almost 50% since 2011-12, this could lead to AAA spread compression if demand is significant," Ziegler, a director of structured products for ORIX Americas, based in Dallas, said.

Right now the fundamentals for the CLO market continue to be strong, and there's been more clarity provided even in the last few weeks around regulatory issues, which have been a headwind for the CLO market for much of the past year.

Ziegler said the recent regulatory move by the Fed to extend the deadline by two years for banks holding CLOs to July 2017 is a "meaningful" modification.

The decision was not ideal for banks that were hopeful legacy CLOs would be grandfathered, but it provides banks with more time to deal with CLO 1.0s, which sometimes contain bonds and would be deemed "covered accounts" under Volker.

The extension provides more time for transactions to amortize and for managers to reduce bond exposure, Ziegler said.

"The CLO market has already been dealing with the ramifications of the Volcker decision as we have seen certain CLO 1.0 transactions that are being re-priced also remove the bond bucket, effectively making the transactions Volcker compliant," Ziegler said.

Meanwhile, the CLO market has seen that selling pressure on bank loans has allowed for more reasonable prices and structures recently.

"CLO managers in general are pleased that loan prices are more attractive because it makes CLOs more attractive," said Josh Terry, head of trading and structured products at Highland Capital Management LP.

Terry said that current market conditions are encouraging him to anticipate rotating into 2.0 deals from 1.0 deals where Highland Capital has been focused.

"We'll rotate into 2.0 when it makes sense in terms of risk and reward," Terry said.

BlackRock brings Magnetite CLO

New York-based investment management giant BlackRock priced $612.4 million of notes due April 2026 in the Magnetite VIII Ltd./Magnetite VIII LLC collateralized loan obligation.

The CLO priced $367.5 million of class A floating-rate notes (rated Aaa), with a spread of Libor plus 148 basis points; $76.5 million of class B floating-rate notes (rated Aa2) at Libor plus 200 bps; $37.5 million of class C floating-rate notes (rated A2) at Libor plus 310 bps; $34.9 million of class D floating-rate notes (rated Baa3) at Libor plus 350 bps; $36.75 million of class E floating-rate notes (rated Ba3) at Libor plus 495 bps, $5.58 million of F floating-rate notes (rated B2) at Libor plus 555 bps; and $53.69 million of non-rated subordinated notes with a residual coupon.

The overall structure is consistent with a typical cash flow CLO.

The non-call period ends April 2016, and the reinvestment period ends April 2018.

Ares expected to price

Los Angeles-based asset manager Ares Management is expected to price $360.75 million of notes due 2024 in a collateralized loan obligation under Rule 144A, according to an informed source.

The CLO includes $240 million of class A floating-rate notes (rated Aaa), with a spread of Libor plus 85 basis points; $33 million of class B floating-rate notes (rated Aa2) at Libor plus 145 bps; $17 million of class C floating-rate notes (rated A2) at Libor plus 220 bps; $14 million of class D floating-rate notes (rated Baa3) at Libor plus 285 bps; $20.5 million of class E floating-rate notes (rated Ba2) at Libor plus 420 bps, and $36.25 million of non-rated subordinated notes with a residual coupon.

The discount margin for class A is 110 bps as the notes are being sold at a discount.

Deutsche Bank Securities Inc. was arranging the deal.

The deal has a two-year non-call period and a four-year reinvestment period.

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