CLO issuance ends early September 'drought'; BB-rated CLO spreads firm 25 bps in secondary

By Cristal Cody

Tupelo, Miss., Sept. 20 - U.S. CLO spreads are mostly better on the week in the wake of new issuance, according to market sources.

"Despite all the discussions and noise on potential tapering by the Fed, the U.S. CLO market firmed a little in the past week or so," Credit Suisse Securities (USA) LLC analysts said in a note. "In the secondary market, spreads stabilized or even tightened a little."

The Federal Open Market Committee did not announce a reduction in the central bank's $85 billion a month asset purchases following the rate meeting earlier in the week, and many market sources now doubt the program will be reduced this year.

New issue CLO spreads are wider in the AAA slice at Libor plus 135 bps to 140 bps area, market sources said.

In the rest of the structure, new deal spreads stand at the 180 bps to 200 bps range for AA-rated tranches; the 325 bps to 340 bps area for A-rated slices; the 420 bps to 440 bps area for BBB-rated notes and the 620 bps to 650 bps area for BB-rated tranches.

In the secondary market, BB-rated CLO spreads have come in about 25 bps to the mid-500 bps area, according to Credit Suisse.

Five deals recently priced include a $650 million CLO from Acis CLO 2013-2 Ltd./Acis CLO 2013-2 LLC; a €335.9 million CLO from Carlyle Global Market Strategies Euro CLO 2013-2, Ltd.; a $350 million 10-year middle-market CLO from Garrison Funding 2013-2, Ltd.; a $516.4 million CLO from Dryden 30 Senior Loan Fund/ Dryden 30 Senior Loan Fund LLC and $412.21 million of notes from Neuberger Berman CLO XV, Ltd./Neuberger Berman CLO XV, LLC.

The offerings follow a "drought in early September," the Credit Suisse note said. "The month-to-date issuance now stands around $2.4 billion, and the YTD total tally has reached around $54.6 billion, already surpassing last year's whole-year number of $54.2 billion."

About $15 billion of new CLO deals are in the pipeline, including a €300 million transaction from NIBC Bank NV, according to market sources.

Risk retention volatility

Risk retention requirements are expected to lead to more volatility and an increase in CLO redemptions if the rule for CLO managers to purchase 5% of the structure takes effect in 2015 or 2016, Dave Preston, an analyst with Wells Fargo Securities, LLC, said in a note on Friday.

"In a post risk retention world, it is likely that fewer managers will be able or willing to issue CLOs," he said. "We expect a meaningful decrease in issuance after the rules take effect. We believe we will see increased issuance in the remaining time before the risk retention rules take effect, as managers work to complete as many deals as possible before the deadline."

One asset manager is expecting to do just fine under the retention rule.

Ares Capital Corp. executives said Thursday during its webcast investor day for analysts and institutional investors that the retention rule will be a positive for the company.

"We think that that regulation favors larger organizations with scale with the ability to support their own vehicles," said Ryan Cascade, co-president of Ares portfolio company Ivy Hill Asset Management, LP. "And what it does is it shuts out two guys in a Bloomberg who are raising all of the capital, don't have an analyst team, don't have the resources and don't have the skill of a large organization."

The specialty finance firm mostly invests in vehicles it manages and does not invest in CLO securities of other third-party managers, Cascade said.

Ivy Hill Asset Management, established by Ares in 2007, manages eight CLOs. The firm last brought a CLO deal in 2011 when it priced the $315 million Ivy Hill Middle Market Credit Fund III, Ltd. offering.

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