Despite first-half CLO volume that bested 2011’s total and put issuance well beyond the midway point of even optimistic projections for this year, CLO market participants remain somewhat cautious about how many more deals the market can absorb in the second half.
True, the doors to the CLO primary market are as open as they’ve been since before the crisis, with $18.13 billion of CLOs printed year-to-date, according to Royal Bank of Scotland analysts, and a robust pipeline of new transactions in various stages of completion.
But given the fits and starts of CLO deal flow over the last year and a half, with macroeconomic conditions dictating the speed of issuance like a periodic red light on a drag strip, most CLO market participants are sticking to predictions made at the start of the year, albeit the top end of the $15 billion to $25 billion range.
In a recent Thomson Reuters LPC poll of CLO managers, investors and traders, more than 60% of respondents believe that CLO issuance will hit $25 billion in 2012. An additional 23% of those surveyed believe that volume will be closer to $30 billion.
“Some of the big [CLO] buyers have taken a pause, reassessing where fair spreads should be given the [latest] volatility, and given the fact that loans have softened somewhat as a result,” said John Clements, a managing director and co-head of CLO primary at Citigroup. “There’s a whole lot of supply, as well. It’s challenging today for the market to digest all of the deals that are out there. Then you’ve got summer, and this has historically been somewhat of a seasonal business.”
How quickly the market can absorb the transactions already in the works is key, seeing as there is no shortage of CLO managers itching to get deals done, including those that are returning to the market for the first time since before the crisis.
“The number of deals in various stages of completion in our pipeline is in the mid-teens,” said Yvonne Fu, a managing director in Moody’s Investors Service’s structured group. “So yes, the pipeline is quite active with repeat managers and managers who have not issued CLOs since 2006/2007.”
Added one CLO manager: “There are certainly a lot of people trying to get things done. And there are certainly a surprising number of quasi-first-time managers, people that I wouldn’t have expected back in the market so soon. Which tells me that investors have become extremely comfortable with CLO structures.”
Comfortable indeed — 2012’s issuance so far has topped 2011’s total of roughly $12.5 billion by one-third. (Issuance in the sector peaked at nearly $100 billion in 2006, before investors fled structured finance products after the subprime mortgage debacle. The market remained on life support from 2008 through 2010, with less than $5 billion in new CLOs completed for those three years combined.)
Add to that history macroeconomic conditions that caused 2011 issuance to have a lumpy consistency, and it’s easy to see why most analysts at the end of last year were forecasting a 2012 only slightly better than 2011. Then came January, with $2 billion of issuance in one month, causing many excited market participants to raise their expectations for volume, with $15 billion to $25 billion becoming the new normal. Now, well into that forecast, the tone remains optimistic, but guardedly so.
“On the positive side, we are seeing investors refreshing their buying programs or starting new buying programs,” Clements said. “We are seeing new interest from smaller banks and insurance companies, along with larger institutions, be it asset managers, pension funds or banks. We’re in a strange period as people have been describing it, but I think the tone is much more positive today than it was even [a few] weeks ago.”
Demand for CLO paper earlier in the year drove spreads on most triple-A tranches in, to the Libor plus 130-140 bps range in April and May. Then macroeconomic forces took their toll, with renewed concerns about Europe’s debt crisis once again suppressing investor appetite for CLOs, and spreads widened back out to as high as Libor plus 150 basis points in June. And market participants generally think they’ll remain in the 130-150 range, with vacillations dependent on the latest news.
“There was a deal that priced around 130 [bps on the triple-A tranche], and we were thinking that the next print would be pushing through that, then Spain hit,” the CLO manager said. “Maybe the world we live in just doesn’t permit that kind of tightening because of a latent fear about what might happen.”
The last week of June saw two deals completed, one from Prudential Investment Management, which raised a $413.4 million CLO via Credit Suisse and Mitsubishi UFJ Securities, and the other from CIFC Asset Management, which printed a $464 million transaction via RBS
Among issuers with deals in the pipeline, Blackstone’s GSO Capital unit appears to be the furthest along with its Gramercy Park CLO. The $500 million transaction recently hit the market with Citigroup running the books. It is the firm’s first CLO since August 2011, when it priced a $369 million deal, also via Citigroup.
Managers preparing offerings for the first time since the crisis include American Capital Strategies,Halcyon Structured Asset Management and McDonnell Investment.
American Capital and McDonnell last priced deals in 2007. Deutsche Bank is arranging both of their new offerings, while Citigroup is raising Halcyon’s forthcoming CLO, its first since 2008.
And word on the street is that UBS is running the books on a transaction from Neuberger Berman, a newcomer to the CLO market.