Western Asset prices $352.3 million CLO; Oaktree closes issue; A-rated spreads soften

By Cristal Cody

Tupelo, Miss., June 19 – Western Asset Management Co. LLC priced a $352.3 million CLO in the firm’s first new issue broadly syndicated deal since 2014.

The manager was last in the primary market in 2018 with a refinancing deal.

In other deal activity, Oaktree Capital Management LP closed Friday on its previously reported $386.4 million Oaktree CLO 2020-1 Ltd./Oaktree CLO 2020-1 LLC offering that priced on May 14. The CLO placed the $244 million of class A floating-rate notes at Libor plus 200 basis points.

Oaktree CLO 2020-1 is the manager’s first CLO transaction of the year.

More than $28 billion of dollar-denominated CLOs and over €7 billion of European CLOs have priced year to date.

“Most new CLOs that priced in April, May and first half of June had reinvestment periods of less than three years, much more than the typical 10% of deals and well short of the usual RP of four to five years,” Fitch Ratings said in a report on Friday.

Fitch notes that adjusting reinvestment periods “has been a tool to facilitate issuance in the past few months since coronavirus pandemic concerns disrupted markets.”

Including static transactions, overall CLOs with short reinvestment periods of less than three years make up nearly one-half of CLOs that have priced so far this year and about 80% of CLOs priced in each of the past two months, Fitch said.

In the newest issuance, Oaktree’s CLO has a one-year non-call period and a one-year reinvestment period, while Western Asset Management’s CLO has a one-year non-call period and a two-year reinvestment period.

Meanwhile, some older CLOs may see reopenings.

“Some managers of outstanding U.S. CLOs have considered issuing additional notes as a lever to counter tightening test levels,” Fitch said. “Notices that Fitch is aware of include plans to issue subordinated notes and class X notes. Additional note issuances could allow managers to buy more collateral to build par and/or improve concentration limitations and collateral quality tests.”

As previously reported, NYL Investors LLC announced earlier in June it intends to issue a delayed-draw tranche of up to $3 million in the vintage 2018 Flatiron CLO 18 Ltd./Flatiron CLO 18 LLC transaction.

Secondary volume heavy

Broadly syndicated CLO AAA primary and secondary spreads were quoted Friday on average at the Libor plus 165 bps area, about 5 bps tighter in new issuance but about 5 bps wider in the secondary market from the start of the week, according to a Wells Fargo Securities, LLC research note.

New issue single A tranches are printing at an average Libor plus 260 bps, while trading at a Libor plus 285 bps average in the secondary market.

CLO A-rated spreads have widened about 10 bps in new issues and about 20 bps in secondary trading from Monday’s levels, according to Wells Fargo.

BBB tranches are pricing in mid-June about 15 bps tighter on the week at an average Libor plus 400 bps and trading about 10 bps better at a Libor plus 450 bps average.

“Secondary CLO spreads had a marginally softer tone after yet another heavy week of secondary supply,” Wells Fargo analysts said in the note. “Per Trace data, the CLO secondary market traded $3.8 billion from Monday-Thursday this week, after $4.3 billion last week, and $4.4 billion the first week of June.”

Year-to-date secondary volume is already 92% of 2019’s total volume, according to the report.

In 2019, the average monthly Trace volume was $9.2 billion.

“Accordingly, it should come as little surprise that CLO spreads were slightly weaker this week,” the analysts said. “It appears that single-A spreads were most pronounced in widening, after the A/AA basis had reached historical tight levels.”

Lower mezzanine tranches rated BB and BBB “somewhat bucked the trend, as higher quality bonds were still in high demand,” according to the note. “Overall, we see the market’s absorption of the heavy supply with only marginal softening as a positive, showing CLO demand is still strong.”

CLO spreads are expected to tighten on positive technicals, including strong fixed income inflows, supportive central bank policy and limited CLO primary supply, according to the note.

CBO/CDO/CLOs soften

CBO/CDO/CLO paper softened across the capital stack in secondary trading on Thursday, as volume trended lower over the previous two sessions, according to Trace data.

On Thursday, $541.93 million of high-grade securities traded at an average 95.80, down from 96.20 on Wednesday, 97.30 on Tuesday and 96.80 on Monday.

The session saw $218.08 million of non-investment-grade issues trade at an average 59, compared to 68.10 on Wednesday, 79.40 on Tuesday and 69.70 at the start of the week.

Trading volume in CBO/CDO/CLO issues included $692.48 million of high-grade paper on Wednesday, $854.83 million on Tuesday and $537.83 million on Monday and $266.42 million of lower-rated tranches on Wednesday, $408.05 million on Tuesday and $213.46 million on Monday.

Western Asset taps primary

Western Asset Management priced $352.3 million of notes due July 20, 2030 in the Crown City CLO I/Crown City CLO I LLC transaction, according to market sources.

Crown City CLO I sold $210 million of class A-1 floating-rate notes at Libor plus 205 bps at the top of the capital structure.

Citigroup Global Markets Inc. was the placement agent.

The deal is backed primarily by broadly syndicated senior secured loans from issuers based in the United States.

The company last issued a new CLO on April 11, 2014 when it brought the Mountain Hawk III CLO, Ltd. offering.

Western Asset most recently was in the primary market in 2017 and 2018 with two vintage CLO refinancing transactions.

The fixed income investment firm is based in Pasadena, Calif.

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