Onex, Ares price CLOs; loan defaults loom; high-grade secondary supply tops $1 billion

By Cristal Cody

Tupelo, Miss., May 22 – CLO issuance continues to ramp up in May with two more managers tapping the primary market.

Onex Credit Partners, LLC priced a $406.84 million CLO in the manager’s first offering of the year.

Ares Management LLC sold $479.7 million of notes in its first new issue of 2020.

Meanwhile on Friday, AIG Asset Management (US) LLC closed on its previously reported $332.75 million AIG CLO 2020-1, Ltd./AIG CLO 2020-1, LLC offering sold earlier in the month. The CLO priced $210 million of class A floating-rate notes at Libor plus 205 basis points in the senior tranche.

CLO risks

CLOs are facing compounding risks due to the economic fallout from the spread of Covid-19, coupled with approaching loan maturities for companies whose debt CLOs hold, Moody’s Investors Service said in a report released Friday.

“Many speculative-grade companies with debt maturing in 2020-21 were already facing refinancing challenges prior to the Covid-19-induced economic slowdown,” Moody’s said. “Although CLOs are unlikely to step in to fund these types of borrowers, they will have some capacity to absorb other speculative-grade near-term refinancing needs.”

CLOs have the capacity to add $17 billion, or 41%, of speculative-grade loans, and 16% of the total $106 billion of speculative-grade corporate debt maturing in 2020-21, according to the report.

“In order for CLOs to absorb half of the speculative-grade loan refunding needs, CLO issuance in the next two years would need to total $20.5 billion, and $41 billion to absorb the entire volume of speculative-grade loans,” Moody’s said.

Roughly $12.6 billion, or 3%, of the collateral in all CLOs Moody's rates will mature in 2020-21, while about $41 billion, or around 3%, of U.S. leveraged loans it rates will mature in the same period, according to the report.

“Despite the small percentage of CLO collateral set to mature in the next year, the economic fallout of the Covid-19 pandemic has increased the default risk for leveraged loan borrowers,” Moody’s said.

Fitch Ratings said in a report on Friday that May institutional term leveraged loan defaults already tally $13.5 billion, the most since April 2014.

“The default volume for YTD 2020 stands at $34.1 billion and is on pace with Fitch’s projection of $80 billion by YE 2020, and more than $200 billion through YE 2021,” Fitch said. “Retail is the largest contributor, accounting for 18% of this year’s default volume despite a 4% index weighting.”

CLO secondary

Elsewhere, secondary volume soared to $1.11 billion in investment-grade CBO/CDO/CLO paper on Thursday as prices improved, according to Trace data.

High-grade paper averaged 94.60 on Thursday, compared to 93.10 on Wednesday, 95.50 on Tuesday and 94 on Monday.

Volume climbed from the $578.13 million of issues traded on Wednesday, $500.95 million on Tuesday and $484.92 million on Monday.

Trading volume in non-high-grade issues softened to $232.54 million on Thursday from $276.74 million on Wednesday, but above the $179.05 million of volume seen Tuesday and $74.34 million at the start of the week.

Average prices for lower-rated paper improved to 69.40 on Thursday from 68.90 on Wednesday, 67.50 on Tuesday but still off Monday’s average of 70.50.

Onex prices $406.84 million

Onex Credit Partners priced $406.84 million of notes due April 20, 2030 in the OCP CLO 2020-18 Ltd./OCP CLO 2020-18 LLC transaction, according to market sources.

The CLO sold $240 million of class A floating-rate notes at Libor plus 180 bps in the AAA-rated tranche.

BofA Securities, Inc. was the placement agent.

The notes are backed primarily by broadly syndicated senior secured corporate loans.

The Toronto-based private equity firm priced one new issue dollar-denominated CLO in 2019.

Ares brings $479.7 million notes

Ares Management priced $479.7 million of notes due April 15, 2031 in a CLO offering that closed Thursday, according to market sources.

Ares LV CLO Ltd./Ares LV CLO LLC sold $287.5 million of class A-1 senior floating-rate notes at Libor plus 170 bps at the top of the capital structure.

J.P. Morgan Securities LLC was the placement agent.

Ares CLO Management LLC will manage the CLO.

The offering is backed primarily by broadly syndicated senior secured corporate loans.

Ares Management is a Los Angeles-based alternative asset management firm.

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