If Ares CLO Management's first collateralized loan obligation of 2019 features is any indication, risk premiums on new issues are headed wider still.
The senior, triple-A rated tranche of the $507.5 million Ares LI CLO pays 130 basis points over Libor according to rating agency presale reports. That's significantly wider than 121 basis points average for new CLOs backed by broadly syndicated loans that were issued in December.
Ares is one of the largest U.S. CLO managers with 20 outstanding deals totaling $15.7 billion under management. Each of the four deals it completed in 2018 priced at spreads inside, sometimes well inside, the market average for the respective month, according to data compiled by Refinitiv. So this deal is likely a bellwether for the broader market.
Another new-issue CLO seeking price discovery, GoldenTree Loan Management US CLO 4, has an expected senior AAA spread of 129 basis points, according to an S&P Global Ratings presale report.
The loans used as collateral have a weighted coupon of 7.5%, resulting in weighted average spread of 3.2% between interest earned on the collateral and interest paid out on CLO securities. That's below-average level for CLOs rated by Moody’s Investors Service.
Among other portfolio metrics, the deal will have a 9.1-year covenanted weighted average life, although the identified portfolio of assets only had a 5.6-year WAL at the cut-off date for ratings agency analysis.
Moody's and S&P disagree on how much exposure the deal has to loans rated Caa (by Moody's) or below.
Moody's puts it at 8%, based on assets identified as of the cut-off date, which is only 88% of the eventual total. The deal's documents limit triple-C rated assets to 7.5% of the portfolio, so it's possible that higher-rated assets to be acquired in the future will dilute exposure to triple- C assets. However, Moody’s notes in its presale report that the initial 8% exposure “is relatively higher than typical CLOs at closing.”
(By comparison, only 3.3% of the initial portfolio for Ares previous CLO was rated Caa or lower.)
S&P measured triple-C exposure in the initial portfolio at below 5%, based on its own ratings of the assets.
Most CLOs are issued with no more than 5% exposure to triple-C assets. This reduces the risk of breaching their 7.5% caps on such assets in the event loans are downgraded. However, some managers have been allowing themselves leeway to hold more triple-C rated assets, mindful of the large amount of outstanding loans rated slightly higher, at single B, and the potential for downgrades. Moody’s recently reported that through November single-B loans made up 43% of 2018’s $1.3 trillion in leveraged loan issuance, vs. 37% in 2017.
A handful of CLOs were priced in 2018
Ares' deal has a standard five-year reinvestment period and cannot be called for two years. It is expected to close in March. It is being structured through BNP Paribas.
