U.S., Europe CLO primary cools; trading choppy; spreads widen; B spreads ease 100 bps

By Cristal Cody

Tupelo, Miss., Feb. 8 – CLO primary action continues to remain quiet to date in February, according to market sources.

“No CLOs priced for the second consecutive week, as the slowdown in issuance continues amidst persistent market volatility and relative value comparisons to the secondary market,” J.P. Morgan Securities LLC analysts said in a note.

Some deals in the works include CreekSource LLC’s $300 million Mill Creek CLO II, Ltd./Mill Creek CLO II LLC transaction via Goldman Sachs & Co. Prudential Investment Management, Inc. also plans to price the $507.75 million Dryden 42 Senior Loan Fund/Dryden 42 Senior Loan Fund LLC offering via BNP Paribas Securities Corp.

U.S. secondary market activity was moderate over the past week with BWIC volumes totaling about $560 million, according to BofA Merrill Lynch.

“Trading remained choppy as broad market volatility remained elevated,” BofA Merrill Lynch analysts said in a note. “Following the sell-off that started around mid-2015, the basis between 2.0/3.0 BBB and BB has gapped wider from 220 [basis points] to 475 [bps]. CLO 2.0/3.0 BBB spreads themselves have moved out by 160 [bps] to 575 [bps] while BB spreads have moved out by 415 [bps] to 1050 [bps] since mid-2015.”

CLO 3.0 AAA-rated notes are trading about 8 bps weaker on the year in the Libor plus 180 bps area, according to JPMorgan.

BB-rated spreads have widened 175 bps year to date to the Libor plus 1,000 bps area.

CLO B notes widened 100 bps over the past week and were 375 bps wider on the year at Libor plus 1,500 bps, JPMorgan said.

Euro primary, secondary thin

Secondary trading volume was light in the European market over the past week with about €25 million of CLO 1.0 and 2.0 BB and BBB bonds on BWIC lists, according to the BofA Merrill Lynch note.

“Demand remains weak for 2.0 lower mezzanine bonds, and spreads appeared to widen again to the 900s for single B bonds and mid-700s for BB bonds,” BofA Merrill Lynch analysts said.

The European CLO primary market has seen one deal price year to date.

“Although some managers are reportedly aiming to price deals in February, the primary market is likely to remain slow given current market conditions,” the BofA Merrill Lynch analysts said.

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