Babson Capital is the first CLO manager to brave market volatility at the start of the year with a new deal.

Standard & Poor’s has assigned preliminary ratings to two tranches of notes to be issued by the $407 million Babson CLO Ltd. 2016-I: $248 million of class A notes and $2.5 million of class X notes are both rated ‘AAA.’

Morgan Stanley & Co. is the initial purchaser.

The notes will be backed by a revolving pool of broadly syndicated loans. As of Jan. 12, 2016, the issuer had identified 90.0% of the total assets expected to be acquired.  In many respects, this collateral looks much like that backing deals completed in 2015, though unsurprisingly, it has no exposure to obligors in the commodity or energy sectors, which have sold off sharply.

Up to 80% of the loans may covenant lite, in line with recent deals and with the composition of the broader loan market.

Among other, riskier types of assets permitted, up to 7.5% of the collateral may be debtor-in-possession financing and up to 4% may be second-lien or senior unsecured loans. Up to 20% of obligors may be outside the U.S. but there can be no exposure to emerging markets.

Babson completed two deals in 2015 totaling just over $1 billion, according to Thomson Reuters LPC. It manages a total of 13 deals totaling $4.23 billion that are rated by S&P.

It’s no surprise that issuance is off to a slow start, given the widening in CLO spreads.  Spreads on triple-A tranches finished the year at Libor plus 165 basis points, according to Wells Fargo – their widest level since 2011, and well above the projected year-end rates in the 120s-130s. Spreads on double-B and single-B tranches are also at their widest marks since 2012.

But the last two years got off to a slow start as well. Only $2.5 billion priced in January 2014, as managers digested the final version of the Volcker Rule published the previous month. And January 2014 racked up $5 billion before issuance really took off in the months following.

“In some ways there are similarities between the market conditions at the start of 2016 as at the start of 2015,” analysts at Deutsche Bank noted in a report published Wednesday. “CLO spreads had been trending wider throughout the preceding fall and towards the end of the year there was a sharp sell-off in loans which got reflected in new issue loan spreads.”

The report noted, however, that new issue spreads are sometimes based on relatively low volumes, and so should be taken them with a grain of salt.

Without CLO issuance picking up again, however, the demand for loans is limited.

Add to that fact that investors keep pulling money out of bank loan mutual funds, the other big buyers in this asset class, and the demand for loans really shrinks.

This lack of demand works in favor of CLO creation. Managers profit from the difference between spreads on notes issued by CLOs and spreads on loans used as collateral. “In order to keep loan issuance flowing, new CLO issuance is needed, and without it new issue loan spreads would likely widen further and CLO spreads would tighten, particularly at the more senior part of the capital stack,” the Deutsche report states. “And that would help CLO issuance find a new level of the arbitrage.”

Deutsche Bank expects issuance to start picking up, though the market may not find a good rhythm until global markets find a bit more stability.

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