A slew of loan-backed deals are circulating the CDO market, with about $3.7 billion of visible cash transactions in the pipeline from both European and U.S. issuers. This represents more than 27% of the new issue calendar as tracked by ASR.
Year-to-date high yield loan CDOs have accounted for about 15% of the market by volume, or $11 billion of the $75 billion priced, including super-senior, money market and CP tranches.
While market conditions remain strong for CDOs, some have expressed concerns over the availability and expense of collateral, which continues to enjoy relatively tight market conditions. Many CLOs are coming to market only half ramped-up, in order to lock in current liability spreads. "I would focus on the deals where all of the collateral is in it day of closing," said one investor.
Others are less worried about the availability of collateral - deals will stop coming if the arbitrage slips. "The only real risk to the supply pipeline is if there's a real flood, and then maybe the liability spreads will widen out and that could put some pressure on new deals," said Dan Castro, head of ABS and CDO research at Merrill Lynch. "It trims the arbitrage a little bit."
Current CLOs benefit from longer ramp-up periods, usually with four to six months to continue adding after closing. On the flip side, some of the deals currently marketing are fully ramped - backed by older-vintage loans, or a mix of new issue and secondary, said one collateral manager. Apparently, to take advantage of CDO spreads, some managers are liquidating their older CLOs - which either reached natural maturity, or are old enough to be callable - and repacking them into new issues. This trend is not exclusive to loan deals, sources said, though the other predominate sector, structured finance-backed CDOs, is younger and outstanding deals are from more recent vintages.
CDO pricing has come in substantially over the past six months. Last June, senior triple-A CLOs classes were pricing in the high 50s to low 60s over Libor. Most U.S. deals are pricing in the 38 to 40 ranges.
"CDO investors are looking for supply right now, so it's an opportune time to come to market," said the CLO portfolio manager. "While collateral spreads are tight, the expectation is that the default rates will be lower."
Last week, European asset manager RMF Investment Products hit the market with a 300 million deal, pricing its triple-As at 40 over six-month Libor. This was said to be the tightest this year for a European deal.
According to a recent piece by UBS, European loans are particularly attractive to CLOs in the current market, as they exhibit strong spread stability. By contrast, most of the other CDO collateral markets have tightened significantly over the past several months. European loan spreads are generally fixed at one of a few different credit tiers, while U.S. loans are priced on a loan-by-loan basis subject to both credit and market movements.
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