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Carlyle prices second U.S. CLO of 2018 at wider AAA spreads

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The Carlyle Group priced its second U.S. collateralized loan obligation of the year this week at spreads wider than the prior deal, completed in April.

It's an illustration of the market's dynamics: Demand for CLOs has been running at near-record highs, but for much of the past year it was hard to source collateral for deals. Now that the supply of outstanding speculative-grade corporate loans has finally picked up — it has surpassed $1 trillion for the first time in the market's history — the resulting glut of CLO issuance has pushed spreads wider.

According to S&P Global Ratings, Carlyle priced the senior, triple-A-rated tranche of its $611 million Carlyle U.S. CLO 2018-2 at 109 basis points over Libor. That's seven basis points wider than the spread on the comparable tranche of a deal Carlyle priced Just three months prior.

Carlyle’s latest deal capped a month with $11.7 billion in new issuance, according to JPMorgan, just above the $11.5 billion month record-setting pace so far in 2018. But triple-A spreads on CLOs of broadly syndicated loans have widened for four consecutive months — from a nearly five-year low spread of 98.4 basis points in March to as wide as 115 basis points in July, according to Thomson Reuters LPC and ratings agency presale reports.

The oversupply of CLOs stems from a pickup in refinancing and reset activity that includes several “reissue” deals that of recent-vintage CLO portfolios being extended with new two- to three-year reinvestment periods. Many of these deals were originally priced well in excess of the 107- to 115-basis-point spreads found in July’s deals.

Refinancing and reset activity through July has topped $93.1 billion, on top of the $81.4 billion in new-deal volume. The primary issuance level is on pace to meet bank research forecasts of $130 billion (JPMorgan) to $150 billion (Deutsche Bank and Wells Fargo) — and to potentially shatter the 2014 record volume of $124 billion.

More deals could be coming from Carlyle. On a conference call Wednesday to discuss second-quarter earnings, chief financial officer Curtis Buser said the company is looking to expand its $36 billion global credit business, which houses $22 billion in actively managed CLOs.

The global credit division’s assets under management grew 15% in the past year, driven by fundraising that included nearly $5 billion in CLO new-issue and refinancing activity, according to co-chief executive Glenn Youngkin. “We do remain confident that we can deploy our $81 billion of available capital into investments that meet our risk and return hurdles,” Youngkin said on the conference call.

Carlyle also has a five 2015- and 2016-vintage deals existing non-call periods in the third quarter that will be eligible for refinancing, according to Fitch Ratings. Thomson Reuters LPC data showed the firm deployed the refi option on five deals totaling $2.8 billion during the second quarter.

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