With the pricing of five new deals since mid-March, the European collateralized loan obligation market has broken out from a slow start in 2016 to put itself on pace to match, or exceed, 2015 new-issue volume levels.
Buoyed by improved investor confidence after the European Central Bank announced new quantitative easing plans, the Euro CLO market his risen back with transactions totaling nearly €1.8 billion in the last few weeks. Only two deals were completed in the first two and a half months of the year totaling €825 million.
Deals in the past week included the €278 million Bosphorus CLO II deal for Commerzbank, arranged by Stifel, Nicolaus & Company, Inc. UK’s 3i Debt Management, after a two-month delay, was able to finally price its Harvest CLO XV €413 million transaction.
The seven Euro deals priced this year now total €2.6 billion. That trails the total from the first quarter in 2015 when eight Euro deals added up to €3.1 billion, but now investment bank analysts are now affirming projections of €15-€16 billion in 2016 issuance that would match or slightly exceed 2015’s €15 billion volume benchmark.
The comeback ensued after the ECB announced plans in early March to boost quantitative easing, through a €20 billion monthly increase in its corporate-bond purchase program beginning in April.
While the purchase of investment-grade debt would not directly impact the demand for CLOs whose notes are backed by leveraged bank-loan debt, the ECB’s actions appear to be stoking demand for higher-yielding assets. The par weighted average price on JPMorgan’s European leveraged loan index was up $1.42 for March, with yield tightening by 65 bps.
Thomson Reuters reported last week that European CLO trade prices increased in March to an average purchase price of $98.71 per $100, after falling in January and February.
Major syndicated leveraged loan offerings are also returning to the table after an early year sell-off, such as Euro Garage’s GBP745 million (US$1.05 billion) refinancing activity that concluded in early March.
The European CLO market has been slowed due to the worldwide credit market crunch and the sparse loan supply. European CLO portfolio trading saw a dip in the buy-to-sell ratio in trading to just 1.3:1, according to Thomson Reuters, well below the 60% to 70% share that buying normally sees in Euro CLO trading activity.
But the new CLO deals that printed in March prompted a Citigroup analyst last week to renew his projection of a slight year-over-year increase in CLO issuance for 2016. “We can still get close to 16 billion euros of issuance, but only if investor fears subside and CLO spreads tighten,” Citigroup’s Ratul Roy told Bloomberg.
Wells Fargo structured finance and CLO analyst David Preston concurred, in a report issued Friday. “The late surge put Euro CLO issuance almost on pace with 2015 issuance,” he wrote.
According to Wells, lukewarm investor had pushed AAA spreads in Euro CLOs to the 150-155 bps range during the first quarter, up about 5 bps from the fourth quarter 2015. Much wider spreads developed further down the capital stack, however, with new-issue triple-B spreads widening 100 bps to 515 bps from the fourth quarter, and BB-rated spreads wider in the 800 bps range compared to 650 bps just a quarter earlier.
Prior to March, the only European CLO deals were BlackRock’s debut €410 million CLO in February arranged by Credit Suisse that followed January’s issuance of Oaktree Capital Partners’ €414 million Arbour CLO III.
Following the ECB’s bond-purchase program expansion, European CLO manager CVC Credit Partners brought CVC Cordatus Loan Fund (sized at €411mn) to market via Credit Suisse, followed soon after by U.S. CLO manager BlueMountain Fuji Management pricing its first Euro-denominated CLO on March 22 (€410 million) through JPMorgan.
European CLO assets under management closed February with €64.8 billion.
