After less than $1 billion in new issuance in January, the 2017 CLO market “is running on all cylinders,” the Loan Syndications and Trading Association declared in its weekly newsletter Friday.
New collateralized loan obligation volume through Feb. 10 has already topped $3.2 billion with at least nine new deals in the pipeline, the LSTA reported. That adds to $4.8 billion in refinancing activity for the month, after two more refis were priced on Thursday, according to JPMorgan research.
Year-to-date, 36 CLOs have priced totaling $16.6 billion at a pace that has far surpassed recent market performance in which January is usually the slowest month of the year. Last year through mid-February, only three deals had priced at a volume of $1.3 billion, according to JPMorgan.
At its current pace, the CLO market could by the end of spring reach the full-year forecast range of $50 billion to $70 billion of gross issuance that bank research firms had projected in December.
Among the new deals this month are the $506 million KKR CLO 17 transaction that represents KKR Credit Advisors’ first 2017 deal. Moody’s Investors Service on Friday assigned ratings to the five note classes, including the triple-A Class A tranche sized at $325 million and an assumed coupon of three-month Libor plus 135 basis points.
As with any new-issue CLO, KKR maintained a 5% risk-retention interest in the deal represented by a “horizontal” stake in each of the note classes. Moody’s reports the deal is also compliant with European risk-retention standards.
The AAA-spread on KKR’s deal matched the average achieved by this month’s new deals, which a year ago had spreads in the 150s area.
Impacting CLO formation is the decline in leveraged loan prices (dropping 13 cents in the past month, according to JPMorgan), and the Markit liquid leveraged loan index (which tracks the 100 most actively traded senior loans in the market) has declined 0.08% so far in February.
“While falling loan spreads are making the arbitrage challenging for old and new CLOs alike, at least the new CLOs also are enjoying narrowing liability spreads,” the LSTA stated.
January’s burst of CLO refinancings continued to roll out this month with $5 billion in replacement notes being issued in existing deals, including Crescent Capital Group’s $478.5 million refi of Atlas Senior Loan Fund VI, a 2014 vintage deal. According to Standard & Poor’s, Crescent was able to reduce the rate on the $340.45 million Class A, triple-A rated tranche to Libor plus 125 basis points from its original rate of 154 basis points over Libor.
Ironically, it was Crescent’s legal query to federal regulators in 2015 that set the stage for the 2017 refinance revival that followed the enforcement risk-retention standards to new deals entering the year.
The “no action” letter Crescent received at that time advised that CLO managers would be permitted a one-time refinancing of a CLO after the launch of the risk-retention enforcement period, so long as the manager could achieve a lower rate while keeping the original deal structure intact.
Among the most active managers in refinancing is Ares CLO Management, which has offered up three refinancing transactions to start the year. The latest is the Ares XXI CLO from 2014, for which the company is refinancing $896.8 million in replacement notes that Moody’s has rated. The triple-A rated A-1-R notes, sized at $759.9 million, carries a coupon of 120 basis points over Libor.