CLO spreads firm; broadly syndicated CLOs price 25 bps-50 bps tighter than middle market

By Cristal Cody

Tupelo, Miss., Aug. 20 - CLO primary market activity was subdued on Tuesday with "not too much" action expected, according to one CLO management source, who was headed out for a week of vacation.

"Very quiet out there," the source said.

In the secondary CLO market, AAA-rated notes are trading better in the Libor plus 133 basis points range, while BBB-rated tranches are firmer at the Libor plus 415 bps area, according to market sources.

"In general, CLO spreads have moved tighter in August, with much of the movement in the BBB and BB tranches," Dave Preston, senior analyst at Wells Fargo Securities, LLC, said in a note on Tuesday. "Amid slower summer trading, BBB and BB spreads are generally 50 bps tighter on the month. Levels were choppier last week as the equity markets sold off. Spreads were stickier at the top of the stack."

Middle-market CLOs widen

Middle-market CLOs on average have priced 25 bps to 50 bps wider than broadly syndicated CLOs, Preston said.

"The middle-market loan market has not tightened over the past 24 months to the extent the broadly syndicated market has," he said. "Also, Libor floor levels have remained higher in the middle-market sector."

Year to date, seven middle-market CLOs totaling $2.3 billion have priced, including a $400 million offering on Aug. 16 from NewStar Financial, Inc., which placed the NewStar Commercial Loan Funding 2013-1 LLC CLO via Natixis Securities Americas LLC, sources report. The deal is collateralized by small and medium enterprise and broadly syndicated loans.

Compared to broadly syndicated loan CLOs, middle-market CLOs offer greater levels of subordination, more excess spread and higher yields, but have less diverse asset pools and may be less liquid, Preston said. The CLO manager also is more important when investing in middle-market CLOs than in broadly syndicated CLOs, especially for AAA CLO investors, he said.

Middle-market loan all-in spreads are holding in the 600 bps range.

"Middle-market CLOs of the 2012-2013 vintage feature asset portfolios with an average weighted average spread 165 bps higher than 2013 broadly syndicated CLOs," Preston said. "When comparing collateral pools, middle-market CLO investors are exposed to collateral approximately one notch lower in rating."

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