Markit, the global financial information services company, has launched a new service for the pricing of collateralized loan obligation (CLO) tranches.
The service covers more than 5,000 investment grade tranches of U.S. and European CLOs. It was launched in response to demand from customers for a high quality, independent data. The data provided by Markit will be used for price discovery, price verification, valuation and risk management.
Markit already provides a similar pricing service for other kinds of securitized products, including residential mortgage-backed securities, commercial mortgage-backed securities and consumer asset-backed securities, as well as for corporate, sovereign and municipal bonds.
U.S. CLOs have become one of the most active areas of structured finance and are once again the most important buyers of noninvestment grade U.S. loans. Issuance of new U.S. CLOs has reached over $28 billion year to date and is expected to reach as much as $75 billion by year’s end, up from $53 billion in 2012.
Demand for new issuance has spilled over into the secondary market, where spreads have narrowed both in the U.S. and Europe. In the U.S., spreads on triple-A rated tranches of deals issued post financial crisis were around 110 bps at mid-April, compared with 142 bps at the beginning of the year, according to Markit.
In Europe, triple-A spreads have come in by a similar amount, to around 125 at mid-April from 150 in early January
Spread narrowing in Europe has been key to restarting the new-issue market on that side of the Atlantic for the first time since the financial crisis. Five European CLOs have launched this year, totaling around €1.74 billion, according to Thomson Reuters. Managers say these deals make sense now because spreads on liabilities have contracted so much more than spreads on loans used as collateral, improving the arbitrage.
Markit's CLO pricing service has been under development for about nine months, including four months of beta testing with select customers, according to Nathan Kirk, a director and head of U.S. securitized products.
“Hopefully it gives clients a good sense of what they are holding today and also how liquid it is,” Kirk said.
He said Markit will use the same liquidity score, with a scale of one to five, for CLO tranches that it uses for its pricing services on other securities.
The service uses observable market data and best-in-class models to value CLOs. The company will provide customers with detailed information on data inputs and the assumptions used in the evaluation process, ensuring transparent valuations. Customers will also gain access to Markit’s team of CLO evaluators in addition to a price challenge process.
Kirk said the 5,000 investment-grade tranches the service currently covers represent about 75% of the outstanding universe of U.S. and European CLOs; the remaining 25% are mezzanine and equity tranches. The pricing service will be expanded to over these tranches later this year.