Barclays Capital says there appears to be a “floor” on 'AAA' CLO spreads, at least until there is some better news out of Europe.
Four CLOs that debuted this week printed with somewhat wider 'AAA' spreads than those in late April and early May, when there were several deals with 'AAA' coupons at Libor plus 130 bps.
The $283.5 million Sugar Creek CLO from 40/86 Advisors featured a 'AAA' spread of Libor plus132 basis points; Venture X CLO, a $425 million CLO from MJX Asset Management, priced the 'AAA' tranche at Libor plus 133 basis points; the $353 million KVK CLO 2012-1 from KVK Credit Strategies printed its AAA coupon at Libor plus 137 basis points; and the $410 million Blue Mountain CLO 2012-1’s AAAs tranche had a coupon of Libor plus 132 basis points.
These four deals bring CLO proceeds for 2012 north of $13 billion, including middle market structures, exceeding the total from all of 2011.
In their weekly credit markets research, Barclays analysts noted that this uptick in 'AAA' spreads reverses a six-month trend toward tighter prints. They said some market participants had expected to see spreads fall below Libor 130 basis points, where they were before the market abruptly shut down in August 2011. The analysts now think this is unlikely, however.
“With $5-plus billion in additional CLOs currently being marketed and frequent reports of pre-crisis CLO managers looking to re-engage, we expect new CLO supply to remain robust, so a significant increase in demand will be required for spreads to resume a tightening trajectory,” the analysts said in the report.
“Despite their 'AAA' credit rating, seemingly impenetrable subordination, and track record during the financial crisis and recession, senior CLO tranches are not treated as riskless by market participants and will continue to trade in synch with other risk asset classes,” they wrote.
Barclays doesn’t expect new issue CLO AAA spreads to breach Libor plus 130 basis points “without a material improvement in European news flow and more consistent U.S. economic data.”