Collateralized loan obligations (CLOs) were the one of the hottest sectors of 2012, at least in terms of the number of deals, and December was no exception. Another active month, with some $7 billion of issuance, brought the total for the year to about $53 billion, according to various estimates. That was roughly four times the volume seen in 2011. It also marked the busiest year since 2005.
What’s driving issuance? Scott D’Orsi, a partner at Feingold O’Keeffe Capital, chalks it up to the benign default outlook for the noninvestment-grade, senior corporate loans that serve as collateral; the attractive pricing of these assets; and an expanding investor base. D’Orsi, interviewed by ASR’s sister publication, Leveraged Finance News, in late November, said that spreads on triple-A tranches of CLOs, which were then, and still are, in the LIBOR-plus-140s range, could tighten by 15 to 20 basis points in the relatively near term.
December saw a mix of old names and new ones, as well as players that hadn’t brought a CLO to market for some time.
Among the latter category, KKR Financial Holdings closed a $412 million offering called KKR Financial CLO 2012-1. The deal’s sponsor is an affiliate of KKR & Co., an investment firm with roots in private equity. It said that the CLO represented its first foray into the broadly syndicated securitization market since 2007. KKR Financial will be holding on to about 52% of the CLO’s roughly $45 million subordinated notes, with the rest to be held by unaffiliated third parties.
Among other deals, JPMorgan Securities raised the $515 million Finn Square CLO Ltd. for GSO/Blackstone and Credit Suisse priced the $717.0 million Madison Park Funding X Ltd. CLO for its affiliate, Credit Suisse Asset Management.
GreensLedge Capital Markets raised a $372.5 million CLO for Oak Hill Advisors. The deal, OHA Loan Funding 2012-1, included a $220 million triple-A rated portion that priced at LIBOR plus 139 basis points.
Citigroup Global Markets raised the $311 million Doral CLO III for Doral Leveraged Asset Management. The triple-A coupon priced at LIBOR plus 145 basis points, according to S&P.
And Bank of America Merrill Lynch raised the $568 million CLO XXV for Ares Management.
Most CLOs that priced during the month of December were arbitrage deals, in which managers use funds raised from the sale of bonds to acquire collateral on the primary or secondary loan market. But there were also at least two deals in which managers used loans already on their balance sheet as collateral.
Hercules Technology Growth Capital, a business development company, (BDC) completed a $231 million CLO, its first. The deal, Hercules Capital Funding Trust 2012-1 LLC, issued $129 million of class A notes rated A2 by Moody’s Investors Service. The notes are backed by $231 million of senior secured loans originated by Hercules.
Hercules, based in Palo Alto, California, specializes in lending to tech companies in various stages of development. Unlike many BDCs that specialize in mezzanine financing, Hercules focuses instead on making senior loans; it also makes some equity investments. Guggenheim Securities acted as arranger of the notes, which pay a fixed interest rate of 3.32% and an expected weighted average life of 1.15 years.
The other balance sheet deal came from DFG Investment Advisers, a New York-based investment firm that specializes in structured finance but had not previously sponsored a CLO. The deal, dubbed Vibrant CLO, issued $281.9 million of rated notes backed by $317.4 million of primarily broadly syndicated, senior secured loans. Its senior-most tranche, the $191 million class A-1, was offered at three-month LIBOR plus 148 basis points. Citigroup Global Markets was the arranger.
Forecasts for 2013 issuance range as high as $70 billion, and market participants say the pipeline is already building, with multiple issuers setting up meetings at the American Securitization Forum conference in late January.
December also saw the last CMBS conduit and CMBS single-asset deals of the year. Goldman Sachs priced a $300 million CMBS deal backed solely by Bridgewater Commons, a three-story, 992,561 square foot super-regional mall and adjacent lifestyle center in Bridgewater, New Jersey.
One person familiar with the deal said that pricing was 10 basis points to 20 basis points tighter than initial guidance. The class A notes priced at 100 basis points over benchmark swap rates, the B notes priced at 130 basis points, the class C notes priced at 170 basis points and the class D notes priced at 215 basis points.
The CMBS conduit deal, JPMCC 2012-LC9, came from JP Morgan. The bank sold the short dated, 2.74-year, triple-A bond at a spread of 25 basis points above interest-rate swap rates, according to a Securities and Exchange Commission prospectus. The 4.78-year, triple-A bonds sold at 40 basis points, the 6.88-year triple-A’s sold at 90 basis points, the 9.86-year triple-A bonds sold at 85 basis points and the 7.28-year triple-A bonds sold at 80 basis points.
In the consumer sector, JP Morgan issued $900 million of five-year notes backed by credit card receivables via its Chase Issuance Trust, according to a regulatory filing. The offering was upsized from $500 million originally. It priced at one-month Libor plus 26 basis points.
The deal brought credit card ABS issuance for the year to date to just over $39 billion, according to Standard & Poor’s.
In a report rating the deal, S&P noted that outstanding credit card ABS has shrunk as the amount of paper maturating this year has exceeded the number of new deals.
Nevertheless, the ratings agency said credit card ABS issuance has exceeded the $6 billion net increase in credit card debt through October. It added that this reflects the desire by some banks for alternative funding sources to deposits.
S&P expects issuance of credit card ABS to be roughly flat in 2013 at around $40 billion. That would fall short of the $50 billion of outstanding credit card ABS set to mature next year.
Consumer Portfolio Services closed its fourth subprime auto loan securitization of the year. The transaction, CPS Auto Receivables Trust 2012-D, issued a total of $166 million of notes in five classes. A $122.4 million A class with an average life of 1.75 years and a fixed interest rate of 1.48% priced at 99.98791%; it is rated ‘A2’ by Moody’s and ‘AA-’ by S&P.
In the agency’s 2013 outlook for the auto loan ABS, Moody’s anticipated a modest drop in the credit quality of deals over the course of 2013. The main catalyst for this will be “higher but reasonable levels of risk-taking,” the agency said.
In Moody’s view, issuance in the sector will keep growing next year, as investors remain hungry for a short-term product that can replace cash and, in the case of subprime ABS, meet the need for more yield.
As for the potential for economic disruption if the fiscal cliff issue is unresolved, Moody’s does not expect much an impact in the auto asset class thanks to the robust characteristics of more seasoned transactions.
There were also some deals backed by more esoteric collateral. Trinity Rail priced a $333.84 million securitization of railcar leases, the company’s first deal of 2012. The deal consisted of two tranches, both of which carry an ‘A’ rating from S&P: a $145.36 million A-1 class and a $188.48 million A-2 class. The two tranches had a blended coupon of approximately 3.0% and an average weighted life of approximately eight years at closing.
S&P noted in its ratings report that credit performance of equipment ABS collateral has been strong in recent years, and it expects this to continue in 2013. However, S&P expects issuance to decline to $12 billion next year after doubling, year-over-year, to $18 billion in 2012.
Most issuers come to market once or twice a year, but some were more active than usual this year because of economic concerns about 2013, according to S&P.
The last deal Trinity brought to market that was rated by either S&P or Moody’s was a $475 million revolving warehouse loan the firm obtained early in 2011. Prior to that, Trinity sponsored a $369.2 million securitization of railcar equipment late in 2010.
Elsehwhere, Westgate Resorts priced a $94 million securitization of timeshare loans, its third for the year. S&P assigned an ‘A’ rating to a $66.5 million tranche with 41.9% subordination and overcollateralization and a ‘BBB’ rating to a $27.5 million tranche with 17.89% subordination and overcollateralization.
Westgate Resorts 2012-3 is backed by 13,256 deeded vacation interval ownership loans with a combined principal balance of approximately $114.5 million. The weighted average coupon for the pool is 15.6%, while the weighted average life of the loans is 26 months.
Finally, Nelnet came to market with a $1 billion student loan transaction. An A tranche for $987 million priced with a spread of 60 basis points over one-month LIBOR. Fitch Ratings and Moody’s gave that class triple-A ratings.
