Redding Ridge offers euro CLO; AAA tranches widen; downgrades cause forced selling fears

By Cristal Cody

Tupelo, Miss., April 27 – Redding Ridge Asset Management (UK) LLP plans to issue €288.2 million of notes in a new euro-denominated broadly syndicated CLO.

Meanwhile, the secondary market saw $931 million of BWIC volume last week, up from $772 million in the prior week, according to a BofA Securities, Inc. research note released Monday.

CLO AAA tranches widened 10 basis points on the week to Libor plus 220 bps on average, “with supply primarily in off-the run-shelves and lower notional size blocks,” while AA and A tranches were flat on the week, the BofA analysts said.

CLO BBB-rated and BB-rated tranches widened 25 bps and 50 bps week over week due to a reduced investor base as downgrade risks increase, the analysts said.

“BBB bonds widened by 50 bps following Moody's actions last Friday which placed 30% of the universe under review for downgrade,” the analysts noted. “Trading activity in up-in-quality portfolios drove BBB to retrace some of the widening and spreads are 25 bp wider vs. last week's levels.”

BBB tranches were quoted ending Friday at Libor plus 725 bps, 25 bps wider on the week.

On Monday, S&P Global Ratings announced that it placed another 96 classes of notes from 92 reinvesting U.S. broadly syndicated CLOs on negative creditwatch due to economic deterioration from the coronavirus.

The aggregate number of CLO ratings currently on creditwatch with negative implications is now at 358, which is about 8.6% of the agency’s outstanding CLO ratings, S&P said.

Monday’s actions focused on the B and BB tranches of CLOs, which now have increased exposure to CCC-rated assets.

So far, no AAA notes, out of 1,080 tranches, or AA tranches, out of 851 tranches, are on creditwatch negative, according to the S&P notice.

The CLO tranche downgrades are causing “overblown” fears of forced selling by life insurance companies and money managers due to restrictions on BB-rated bonds, Wells Fargo Securities LLC analysts said in a note on Monday.

“It is our understanding that most life insurance companies would not sell upon a downgrade to BB, given current BBB tranche prices in low 80’s/high 70’s,” the analysts said. “Also, we believe many life insurance companies may have recently added capital efficient assets (such as mortgage-backed securities, and higher rated corporates) at attractive levels, which could offset some of the increased capital charges from CLO downgrades.”

Redding Ridge plans deal

Redding Ridge Asset Management (UK) plans to issue €288.2 million of notes due 2031 in the new CLO transaction, according to market sources.

The Zinnia Finance DAC deal includes €174 million of class A-1 senior secured floating-rate notes (Aaa); €20 million of class A-2 senior secured floating-rate notes (Aa2); €23 million of class B senior secured deferrable floating-rate notes (non-rated); €17 million of class C senior secured deferrable floating-rate notes (non-rated); €15 million of class D senior secured deferrable floating-rate notes (non-rated) and €39.2 million of subordinated notes.

BNP Paribas Securities Corp. is the placement agent.

The CLO is collateralized primarily by broadly syndicated first-lien senior secured term loans and senior secured bonds.

The London-based firm is part of Redding Ridge Asset Management, LLC, a New York City-based asset management company established in 2016 by Apollo Global Management, LLC.

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