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Brisk October sees CLO spreads tighten despite near-record issuance

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Despite near-record supply in October, investor demand for CLOs was not met, and spreads on spreads on senior securities continued to tighten.

Average spreads on triple A rated tranches of collateralized loan obligations finished the month at 120 basis points over Libor, the tightest levels in three years, according to Thomson Reuters LPC. That was in from an average of 123 basis points a month earlier, in September and 148 basis points a year earlier, in October 2016.

New-issue CLO volume stood at $12.8 billion in October. That was the second-highest monthly volume of the year (trailing only June's $15 billion level), bringing the year-to-date total to $95 billion. That volume figure already surpasses the full-year total for 2016 ($72.4 billion) and nearly matches the 12-month output from 2015 ($98.5 billion). It trails the pace of the banner 2014 market which had placed $105 billion in new-issue CLOs through October of that year, on its way to a record $124.1 billion of issuance.

With the busy October period, total assets under management has ballooned to an all-time post-crisis high of $481 billion (up from $414.7 billion at this time last year).

For the first time in three months, refinancing and resets outpaced new deals with $14.6 billion in combined activity that through the first 10 months of the year totals $142 billion.

The 23 new deals in October averaged $557.8 million apiece, and included issuance from nine managers who priced their deals inside of 120 AAA spread basis points. The tightest spread was for Voya’s fourth deal of the year, Voya CLO 2017-4 which priced at 113 basis points. Voya’s AA coupon spread of 145 was also among the tightest this year for that tranche – and equaling the average 145 basis point AAA spread the market experienced in January.

Dell Inc. remains the widest held asset in CLOs with $3.13 billion in loans within U.S. manager portfolios, following Asurion Corp. ($2.85 billion) and Transdigm ($2.83 billion).

The sharpest drop in CLO holdings occurred with Bass Pro Group LLC debt in U.S. CLOs falling to $1.39 billion from $2.35 billion. The decline occurred after Bass Pro refinanced existing debt in September through new facilities totaling $3.47 billion that were also used to complete its acquisition of outdoor sporting goods rival Cabela’s.

Industry concentrations are unchanged from September, including retail and supermarket debt that maintains a 6% share of CLO portfolio assets. The leading investment sector remains technology debt, covering 13% of CLO pools.

Citigroup held on to its position as the top CLO arranger. For new-issue deals, Citi has a market-leading 15% share through 23 deals totaling $14.23 billion, and also leads the market with $11.1 billion in resets (22 deals). It is second in refinancing arrangements to Morgan Stanley, which has led 40 refis totaling $17.55 billion to Citi’s $14.14 billion in 31 deals.

Thomson Reuters also reported that leveraged loan issuance for the month grew to $80 billion (up $10 billion from September), taking YTD loan issuance to $1.07 trillion – a 53% surge over the same period a year ago. Institutional issuance is more than double at $691 billion, compared to $313 billion through October 2016.

That could bode well for high levels of new-issue and refi U.S. CLO activity to close out the year. Nine deals totaling $6 billion have already priced in the first week of November, according to JPMorgan, including American Money Management Corporation pricing a reset of its $384 million AMMC CLO XII through Societe Generale; Invesco RR Fund pricing its new $510 million Carbone CLO via Citigroup; and Credit Suisse Asset Management refinancing an $819 million 20xx deal, Atrium XII with MUFG Securities.

In addition, Nuveen Alternatives Advisors priced TIAA Churchill MM CLO II sized at $340 million.

Among deals with November closings scheduled, according to ratings agency presale reports, is the $1.5 billion middle-market Fortress Credit Opportunities IX CLO by FCOD CLO Management, as well as a $400 million CLO from Assurant CLO Management, which furthers a recent trend of insurance-related issuers securitizing leveraged loan investments.

In Europe, €1.3 billion in new-issue CLOs priced in October, taking YTD volume to €13.3 billion across 34 deals – closely aligned with activity from 2016. There was also €1.9 billion in refi/reset activity in the European CLO market.

Onex Credit Partners priced OCP Euro 2017-2 (€437mn) through J.P. Morgan, as part of a recent late rush of European deals that have been placed in the market, according to ratings agency pre-sale reports. Aqueduct European CLO 2-2017 is a €410 million offering through UK-based HPS Investment Partners CLO; PGIM has launched the €600 million Dryden 56 Euro 2017; and Alcentra is offering its second CLO of 2017 with the €450 million Jubilee CLO 2017-XIX.

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