Markets volatile with focus on Fed asset purchases; widening spreads hinder new CLO issuance

By Cristal Cody

Tupelo, Miss., June 24 - Volatility may impact CLO issuance over the week ahead as markets remain choppy following the previous week's report that the Federal Reserve could scale back its $85 billion monthly asset purchases before the year is out, according to informed sources.

"It's been a little bit volatile the past few days," one CLO source said on Monday. "There's nothing new in the issue market."

As previously reported, Telos Asset Management LLC is expected to bring a $363.25 million CLO via BNP Paribas Securities Corp.

Telos CLO 2013-4, Ltd./Telos CLO 2013-4, LLC plans to price $3.5 million of class X notes due July 15, 2017 (Aaa//); $214 million of class A notes due July 15, 2024 (Aaa//); $46.5 million of class B notes due July 15, 2024; $29 million of class C notes due July 15, 2024; $19.25 million of class D notes due July 15, 2024; $16 million of class E notes due July 15, 2024 and $35 million of subordinated notes due July 15, 2024.

Another market source said issuers and investors are waiting for the "volatility to die down a little bit."

Still, the new issuance market remains healthy with $16.7 billion in 36 CLO deals in the pipeline, a source reports.

Wider spreads impact calendar

As CLO spreads back up, the arbitrage is not as favorable for equity investors, Dave Preston, senior analyst at Wells Fargo Securities, LLC, said in a note.

"CLO AAA spreads are also subject to a relatively thin investor base, which means AAA spreads sometimes move less gradually than other assets," he said. "In this case, wider AAA spreads may be a symptom of an underlying roadblock: a temporary reduction in the number of AAA buyers."

The all-in cost of debt on a new CLO is now 20 basis points to 25 bps higher than at the tightest levels in mid-May, he said.

BB-rated tranches priced inside 550 bps at their tightest in May, while AAA-rated tranches priced in the 110 bps-112 bps area, according to market sources.

"Many people point to wider AAA spreads as an obstacle to primary issuance in the CLO market," Preston said. "The widening of the AAA spreads is not the only cause of the increased difficulty in new CLO formation. Wider tranches below AA actually have led to almost half of the increase in the CLO cost of debt."

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