U.S. collateralized loan issuance showed encouraging signs of revving up last week as seven U.S. deals hit the market, bringing the final April tally of transactions to 16.
Trinitas CLO IV from Trinitas Capital Management was the final deal to price this week, with a $370 million notes transaction topped by triple-A rated notes paying Libor plus 175 basis points. Not including the Trinitas deal, JPMorgan reports total volume for U.S. CLO issuance in April at $5.9 billion, and at $14.3 billion year-to-date with 36 CLO deals being priced.
That follows a March issuance resurgence of $4.9 billion in new deals following the slow start to the year in January and February.
Earlier in the week, a flurry of deals nearly doubled the monthly output to date for April, which had the second highest monthly volume of deals for 2016.
On Tuesday, Sound Point Capital Management priced the $513 million Sound Point CLO XI transaction through Credit Suisse, with the AAA spread settling at 165 basis points over Libor.
Four deals followed on Wednesday: the $503 million HPS Loan Management 9-2016 CLO from Highbridge Principal Strategies (AAA paper priced at Libor plus 156 basis points); the $402 million Race Point X from Bain Capital Credit; Carlyle Global Market Strategies 2016-2 from Carlyle Investment Management, which was sized at $499 million with AAA spreads at 156 basis points over Libor; and the $200 million Palmer Square Loan Funding 2016-2 deal put together by Palmer Square Capital Management. Palmer achieved a 135 basis point spread for the AAA paper.
HPS, Race Point and CGMS-2 were arranged by Citigroup; Palmer Square via JPMorgan.
JPMorgan also arranged the $360 million Black Diamond 2016-1 CLO that was priced Thursday by Black Diamond Capital Management with the AAA tranche paying at 165 basis points over Libor.
The Trinitas CLO is that manager’s first deal in almost a year, when Trinitas CLO III was issued with a split-tranche of AAA-rated notes with narrower spreads ranging from 160 bps over Libor to 151 bps over Libor.
Two European deals also priced this week: Blackstone/GSO Debt Fund Management and its Elm Park CLO (€558 million) via Deutsche Bank and the Dryden XLIV Euro CLO 2015 BV which will be managed by Prudential Financial’s PGIM. Elm Park’s AAA spread was 150 basis points over Euribor.
Even with the spurt of activity in April, issuance still lags 2015 levels. According to LCD, U.S. issuance for the first four months of the year totals approximately $15 billion; that’s off more than 40%, on an annualized basis from last year’s $97.34 billion.
CLO issuance was tempered during much of the first quarter as managers worked on selling off distressed assets from existing portfolios, and the decline in leverage loan issuance starved the pipeline of new collateral for CLO notes. Only $8.6 billion in new U.S. CLO issuance occurred in the first two months of the year.
In a report issued Monday, Wells Fargo structured finance and CLO analyst David Preston noted that the limited primary market is reflected in current deal structure. "[F]our of the deals issued year to date have been static, while another features a two-year reinvestment period (the majority of post-crisis deals feature 4-5 year reinvestment periods)," the report stated.
Another factor in the decline is that fact the universe of CLO managers has contracted as new risk-retention regulations set for December have priced smaller, less-capitalized managers out of the market.
Managers may have been encouraged to print new deals by activity in the secondary market for CLO notes, where spreads continued to tighten last month. Citing research from Wells Fargo, LSTA noted spreads in the top quartile of CLOs shrank by 30 basis point in the triple-A rated tranches and by 500 basis points on BB tranches since the end of the CLO market slump in February.
The Loan Syndications and Trading Association cited the report in its weekly member newsletter published Friday, saying the “fact that CLO notes are trading up at the same time that credit metrics are softening” may suggest selloff earlier this year “got ahead of actual value.”
