CLO refi/reset activity falls again in September

The declining volume of older U.S. CLOs eligible to refinance under a so-called “Crescent letter” risk-retention exemption contributed to a decline in issuance of collateralized loan obligations in the third quarter, according to Thomson Reuters LPC.

Just $7.6 billion of deals were refinanced or reset in September, bringing the total for the third quarter to $27.2 billion, far short of the pace of the first half, when approximately $138 billion of the nearly $473 billion in outstanding CLO assets were reworked.

“After a busy first half the year, U.S. refinancing and reset activity has begun to trend downward over the course of the third quarter,” Thomson Reuters stated in a monthly report.

A major reason is the decline of CLOs that are eligible to refinance deals that were granted an exemption to risk-retention requirements enacted last December. Under guidance from a Securities and Exchange Commission "no action" letter in July 2015 to Crescent Capital, regulators advised that managers of CLOs issued prior to December 2014 could retain the exemption to "skin in the game" rules through a limited, one-time refinancing arrangement.

The Crescent letter exemption, which allows only for a reduction in coupon rates and no changes to deal structure, is credited with spurring the approximate $39 billion in reset activity this year. As of July, estimates were that only around $34 billion in eligible CLO deals were left that met the conditions of the letter's allowances.

The September refi/reset deals were again outpaced by new-issue deals, which totaled $9.2 billion the quarter. Primary issuance of CLOs was down from $12.4 billion in August, and also off 16% from the previous quarter, with $29.6 billion in new-issue volume during the third quarter.

New-issue volume has reached $82 billion on the year, a total that includes $26.9 billion from the top 10 CLO issuers of the year. The leading issuer is a debut manager, CBAM CLO Asset Management, an insurance-affiliated manager that has sponsored three large-scale deals totaling almost $4.12 billion to outpace GSO Blackstone’s five deals totaling $3.8 billion.

Leveraged-loan activity feeding the CLO pipeline also declined quarter-to-quarter, according to Thomson Reuters, falling 31% to $242 billion from July through September. Year-to-date loan issuance, including refinancings and resets, is $994 billion. The full-year 2016 mark was $601 billion.

The steady activity kept CLO AAA spreads at an average of 123 basis points, a mark that has not varied by more than five basis points since March when coupon discount margins fell below 130. Last year, spreads were a more investor-friendly 153 basis points.

The top loan holdings in U.S. CLO holdings remained Dell Inc. ($3.13 billion), Asurion Corp. ($2.85 billion) and Transigm ($2.83 billion). Two companies saw a surge in CLO manager interest: Level 3 Financing LLC ($1.14 billion) and ENDO Pharmaceuticals ($1.12 billion) each surged into the top 40 among firms with the largest holdings in CLO portfolios.

After CLOs bought up approximately $300 million in debt from Scientific Games in August, holdings in the gaming equipment provider retreated back to $1.4 billion last month, according to Thomson Reuters.

The volume of loans trading at par or above in U.S. CLOs stood at 65% in September, almost unchanged since January (67%) but nearly double during the more tumultuous September 2016 level of 35%.

Citibank remains the top U.S. CLO arranger through three quarters of 2017, spearheading 20 deals with a total volume of $12.68 billion for a 15% market share. Morgan Stanley neared $10 billion through 17 deals for a 12% market share, followed by Bank of America Merrill Lynch with $9.09 billion in 13 deals.

Four new CLO deals priced in Europe in September totaling €1.6 billion, bringing year-to-date volume to €12 billion across 31 deals. Euro refinancing/reset activity topped €2.5 billion for the month.