Issuance of collateralized loan obligations, which had been running well ahead of last year’s levels, now appears to be on hold until credit markets stabilize, according to Bank of America Merrill Lynch.
The firm noted in its June 1 CLO Weekly that there were no new issues priced last week, although there were a few deals still being marketed.
“At this point, the new issue market is trying to find a clearing level amidst the volatility,” analysts said in the report. “Going forward, the new issue pipeline should adjust based on market conditions.”
One of the last CLOs to price was a $311 million deal Citigroup marketed for Silvermine Capital Management, which printed the week of March 21, according to a person with knowledge of the transaction. This brought issuance for the year to date to roughly $13.8 billion, compared with about $2.6 billion during the same period in 2011 and $12.3 billion in all of last year.
Spreads on the senior-most tranches of new CLOs had begun to creep back up after falling as low as Libor plus 130 basis points in late April and early May.
Analysts at BofA Merrill noted in their July 1 report that, since the collateral for most deals is acquired after the deals are completed, rather than warehoused ahead of time, managers do not need to bring new deals to market and can afford to wait on the sidelines until there is further price discovery and stability.
“Given loan spreads are widening in conjunction with CLO liabilities, the arbitrage should remain intact and we would expect managers to be back in the market once they see signs of stability,” they said.
The silver lining for investors is that a slowdown in new CLO issuance should help to provide support for prices in the secondary market for these securities, according to BofA Merrill.
Weak economic data and the deepening of the European debt crisis have pushed CLO spreads out wider, with spreads on triple-As moving out about five basis points over the past week and mezzanine tranches wider by 10-25 basis points, according to BofA Merrill.
