The last time the bank loan market saw a spattering of new CLOs, Twitter was just getting started and Britney Spears was still growing back all of her hair. Now, the details of four new CLOs have begun circulating, one of which will consist of new loans, a source familiar with the deal said.
“This seems to confirm that the hot tub time machine has taken us back to 2006 to 2007,” quipped a New York-based investor.
However, even with four new CLOs to talk about, market participants are still skeptical of their implication.
“It’s an encouraging sign,” a Boston-based investor said. “However, the equity is not being marketed but being funded by a sponsor or company. With normal assumptions, returns will struggle to break into double-digits.” That, he said, will make it hard to envision “a ton of deals, and certainly not a return to high volume CLO creation.”
Loan market participants this week were introduced to CLOs from Citigroup, Bank of America Merrill Lynch, Morgan Stanley and Goldman Sachs. The Citi and Bank of America CLOs were, as of yesterday, closer to the marketing phase than those from Morgan Stanley and Goldman Sachs, sources said.
The $300 million Citi CLO—the second fund the New York-based bank has arranged in less than a month—is comprised of new bank loans, the source familiar with the deal said. This is significant because it shows that primary market loans are attractive enough for CLOs. And even though the target is only $300 million, just a microscopic drop compared to the buying capacity of CLOs several years ago, the new vehicle bodes well for a market that was in critical condition.
Moreover, the fact that it is made up of primary loans was a nice surprise for market participants, who expected the CLO to look like Bank of America’s new vehicle.
The BofA CLO, like the CLO Citi priced late last month, consists of refinanced loans. It couldn’t be determined what Morgan Stanley and Goldman’s CLOs will look like, but sources said they will likely consist of refinanced loans as well.
But as encouraging as the news is, market participants are still skeptical as to whether these vehicles signal the rebirth of the CLO market. Such a revival may be restrained by low potential equity returns given reasonable default rate assumptions, another Boston-based investor said.
“Arithmetic is a stubborn fact. How do you get higher returns with less arbitrage and less leverage? I think the answer is you don’t, you get lower prospective returns. So is the manager buying the equity itself for an uninteresting return because [the manager] gets other benefits by doing the deal? Those other benefits might vary by manager.”
It couldn’t be determined what the equity returns will look like on these four new CLOs. In fact, the only price talk that has emerged was on the triple-A-rated tranche of Bank of America’s CLO, which was between Libor plus 150 basis point and Libor plus 175 basis points.
The $500 million Bank of America CLO consists of a $317 million tranche that has reportedly been assigned a triple-A rating by Moody’s Investors Service, a $113 million tranche with a Ba2 rating, and $70 million in equity, or unrated, notes.
Dubbed the Symphony CLO VII, it will be managed by Symphony Asset Management, a unit of Nuveen Investments that is based in San Francisco and manages approximately $8 billion in leveraged loans, high yield bonds and other securities.
The $300 million Citi CLO, the ALM Loan Funding 2010-1, consists of a $198.8 million tranche that has been assigned a triple-A rating by Standard & Poor’s, a $10.3 million double-A-rated tranche, a $22.8 million single-A-rated tranche and a $62.6 million equity tranche. The CLO will price next month and close in June, according to Bloomberg.
The reason the total is less than $300 million is because the CLO manager, Apollo Management, is still ramping up the portfolio.
The CLO Citi arranged last month, the COA Tempus CLO, is being managed by WCAS Fraser Sullivan Investment Management. That fund consists of a $327 million tranche of triple-A-rated notes, a $15 million tranche of double-A-rated notes, a $36.5 million tranche of single-A-rated notes and a $102.1 million equity tranche. The triple-A tranche priced at Libor plus 190 bps, while the double-A tranche priced at Libor plus 250 basis points, according to S&P. The double-A tranche should yield approximately 3.25%, while the single-A tranche will yield approximately 4.05%. WCAS Fraser Sullivan Investment Management was formed in 2007 with the backing of private equity firm Welsh, Carson Anderson & Stowe.
GSO Blackstone is managing the Morgan Stanley CLO, and Ares Capital Management is managing the Goldman Sachs fund, sources said. Word of GSO and Apollo arranging CLOs first started circulating earlier this month (Leveraged Finance News April 8, 2010).
At the time, sources said Orix was also arranging a CLO. However, no new information has emerged regarding that vehicle.
A New York-based banker that specializes in midmarket loans noted that “new CLOs will only be managed” by firms with good track records, and that that will “exacerbate the difference between the haves and the have-nots, meaning that the bigger managers are likely to only get bigger, while the smaller firms will have a hard time getting deals done.”