CLO refi wave loses more energy in May

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In the first few months of the year, refinancing consumed the CLO market as managers rushed to lock in cheaper funding. New deals were relatively scarce, in part because of the poor supply of new loans to use as collateral.

In May, this trend was reversed. The $9.8 billion of new collateralized loan obligations issued during the month was actually down from April's tally of $10.3 billion, according to Thomson Reuters LPC. But for the first time this year, it surpassed the $8.5 billion that was refinanced (21 deals) or reset (six deals).

Most of the refinancings took advantage of a no-action letter from the Securities and Exchange Commission allowing managers to lower interest rates on deals originally issued before December 2014 without triggering compliance with risk retention deals - but only once. Year-to-date, more than $80 billion in existing CLOs have been refinanced, out of a pool of an estimated $165 billion in eligible CLOs. Under the terms of the letter, obtained by Crescent Capital Group in 2015, no other terms of the deal, such as the maturity date or the number of securities issued, may be changed.

Refinancings and reset volume had topped $20 billion in both March ($23.7 billion) and April ($20.2 billion), and was at $19.1 billion in February.

Most of the refi and reset activity has been driven by managers seeking to lock in low rates prior to expected Fed prime-rate hikes, as well as to enter so-called “Crescent” deals that allow managers a one-time limited refinancings for CLO deals issued prior to December 2014 that will not trigger risk-retention requirements.

Year-to-date, more than $80 billion in existing CLOs have been refinanced, out of a pool of an estimated $165 billion in eligible CLOs that could potentially refinance under Crescent guidelines.

Resets totaled $3.38 billion in May, down from a 2017 peak of $5.13 billion in April.

New issuance stood at just $37.5 billion for the year to date through 67 deals – thought that's more than double last year’s pace when only $19.6 billion was issued from 47 deals.

Panelists at a CLO/leveraged loans industry conference in April expressed optimism that the volume levels this year will at least match 2016's $72.4 billion issuance level (excluding refis). While year-to-date comparisons show 2017 pacing ahead, Morgan Stanley executive director Loris Nazarian pointed out the first-half numbers appear as a slowdown for investors following a nearly $60 billion new-deal push at the end of 2016 - which included $26.3 billion in the fourth quarter alone as managers sought to market deals prior to the risk-retention enforcement date.

The U.S. CLO market is being fed by new issuance that is trending upward in the leveraged-loan market. While refinancings represent most of the volume (63%), in May the level of new-issue corporate senior loans ($29.2 billion) reached its highest share (45%) of institutional loan volume since last September.

The U.S. loan market had volume levels reach $531 billion year-to-date through May, which is only slightly lagging the record 2013 pace of $549 billion level of $1.14 trillion, according to LPC. The total volume is up more than double the $264 billion pace last year, led by the resurgence in institutional loans that have topped $384 billion.

Institutional loans were 35% of the loan market through May 2016; this year, the category represents 70% of the volume through the first five months of the year.

Despite the increase in new issuance, demand for CLO securities held strong; spreads on the senior, triple-A-rated notes reached an average of 128 basis points, the narrowest level in a year.

In Europe, CLO new-issue volume is now slightly ahead of last year’s pace due to May’s performance of €2.4 billion across six deals, bringing the year-to-date total to €6.7 billion. Last year, issuance stood at €5.6 billion after May.

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