Manager tiering pronounced in new CLOs, new issue spreads soft; loans outflows continue

By Cristal Cody

Tupelo, Miss., Feb. 8 – New issue CLO spreads are weaker since the start of the year with manager tiering seen in the primary market.

As of Thursday, average primary AAA spreads were Libor plus 133 basis points, compared to Libor plus 128 bps at the end of 2018, Wells Fargo Securities LLC senior analyst Dave Preston and associate analyst Mackenzie Miller said in a note on Friday.

“CLO AAA spreads have actually continued to widen in 2019, moving 5 bps higher since year-end 2018,” the analysts said. “As a result, CLO AAA spreads are still well off November month-end levels, as opposed to IG and CMBS.”

CLO BBB-rated primary spreads have tightened 15 bps to the Libor plus 385 bps area as of Thursday since the end of December, while BB spreads have firmed 25 bps since the end of 2018.

“As a result, CLO BBB spreads are 80 bps wide of November tights, and CLO BB are still 115 bps wide of the tights of November 2018,” the Wells Fargo analysts said.

Primary spreads are expected to tighten by the end of the quarter, according to the report.

AAA prints vary

The CLO primary market saw its first deals price in late January.

The month had new issue supply of $5 billion, in line with the same period a year ago, though refinancing activity only totaled $2 billion, according to a BofA Merrill Lynch report released on Friday.

Of the new issue CLOs, manager tiering was pronounced “with debt costs especially pressured for new managers with limited performance history,” the analysts said. “This is highlighted by last week's pricing levels on AAA-rated bonds of PPM (whose platform launched last July) at 150 [bps] and Neuberger Berman (an established CLO issuer) at 133 [bps].”

Neuberger Berman Loan Advisers LLC priced $602 million of notes due Jan. 19, 2032 in the Neuberger Berman Loan Advisors CLO 32, Ltd./Neuberger Berman Loan Advisors CLO 32, LLC transaction on Jan. 28.

The CLO sold $366 million of class A senior secured floating-rate notes (Aaa/AAA) at Libor plus 133 bps.

In the following session on Jan. 29, PPM Loan Management Co., LLC priced $405.6 million of notes due April 16, 2032 in its CLO deal.

PPM CLO 2, Ltd. sold $256 million of class A loans (//AAA) at Libor plus 150 bps.

In other activity, leveraged loans continued to report outflows for the week ended Feb. 6, Yuri Seliger, an analyst with BofA Merrill Lynch, said in a note released on Friday. Outflows totaled $470 million for the week, down from a $690 million outflow in the prior week.

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