Trading light in secondary CLO market as new issue pipeline slows; European deals on tap

By Cristal Cody

Tupelo, Miss., July 16 - CLO secondary activity remained quiet on Tuesday on the lack of new issuance in the U.S. market, according to informed sources.

One deal, Intermediate Capital Group plc's €400 million St. Paul's CLO II Ltd., has priced over the past week, according to sources.

"It's just been a slow go of it," one source said. "There's been very few since the second to last week of June."

One or two new U.S. CLO offerings are expected over the week, while a handful of European deals remain in the pipeline for July and August as the market slows for summer, sources said.

"We expect it to be choppy and expect lower issue volumes," a source said.

Market activity was light on Tuesday ahead of Federal Reserve chairman Ben Bernanke's monetary policy report to Congress on Wednesday and Thursday for additional clarity on when the central bank's $85 billion-a-month asset purchases will end.

The program is widely expected to be tapered in September, which could help the CLO market "perk back up," a CLO source said.

Wider AAA tranches eyed

The CLO secondary market quieted from the previous week following a "big uptick in secondary trading volume," according to a market source. "A lot of that was driven by stabilization in the financial markets in general. Sellers were able to get better prices on the bonds they put out for bid than relative to the three weeks prior where there was a ton of volatility from Bernanke's speech."

Spreads are slightly tighter from the previous week but overall wider at the top of the capital structure in AAA-rated tranches, making it tough to get deals completed, a source said.

Triple A-rated tranches are trading in a range from Libor plus 125 basis points to Libor plus 140 bps.

"The equity yields from the bottom of the capital structure don't look as attractive as they did," the source said. "The market believes triple A investors are demanding relatively too wide of spreads for where deals are economical."

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