Palmer Square Capital Management has three collateralized loan obligations in the works that will boost its CLO assets under management by nearly 40%.
Next week, the Mission Woods, Kan.-based manager is expected to price via Credit Suisse a $509.9 million actively managed transaction through Palmer Square CLO, one of its two CLO platforms
This deal is sandwiched between two privately placed, static deals in the firm's other CLO platform, Palmer Square Loan Funding; each of the private deals is sized at over $500 million, according to Chris Long, president and co-portfolio manager of the Kansas City metro-area CLO firm. Neither of the these two deals, is being rated; one was priced this week and closes on April 21, while the other is set for pricing next Wednesday, Long said.
When all three deals are completed, Palmer Square’s CLO assets under management will grow from $3.1 billion at year-end 2017 to $4.3 billion, net of the existing deals being called this quarter.
Palmer Square’s activity is being spurred by attractive spread between cost of funding via CLO issuance and yields on leveraged loans used as collateral, Long told Asset Securitization Report.
“The equity arbitrage is incredibly attractive right now, with how tight the AAA debt costs have gone,” said Long, who founded the corporate and structured-credit specialty firm in 2009. “That has given the arbitrage a big boost.”
The so-called “arb,” or the difference in the cost of funds and what managers, who often retain the equity, or most subordinated securities issued in a deal, pay out on more senior debt tranches, has become increasingly attractive since early 2017. Spreads on senior, AAA rated notes have narrowed into double digits on certian transactions.
In January 2017, the average AAA discount margin on a U.S. CLO was 145 basis points. In February 2018, according to Thomson Reuters LPC, that level had shrunk to 103.9 basis points, with some larger-scale managers able to take out spreads as tight as 95 basis points.
“The debt opportunity for static [deals] is also highly attractive,” Long said. It's "high-quality, floating-rate, short-duration debt.”
The $315 million senior, AAA rated tranche of notes to be issued in Palmer Square CLO 2018-1 is expected to pay three-month Libor plus 103 basis points.
It is Palmer Square’s first transaction in three years from the Palmer Square CLO platform, through which it issues its actively managed CLOs (2018-1 has a five-year reinvestment window). The deal is the firm’s first rated CLO since the $302.9 million issuance last August on the Palmer Square Loan Funding, the shelf that houses Palmer Square’s shorter-term, static-collateral CLOs.
For the Palmer Square CLO 2018-1 transactions, the company repurposed more than 16% of the portfolio from a recently called deal to supply enough identified collateral to push it into the new-issue pipeline.
That called deal was a 2013-vintage CLO that also happened to be Palmer Square’s debut CLO from 2013.
“Every time a deal is called we are analyzing whether there is some collateral within the called deal that would make sense within a warehouse or new deal,” Long said. “In this instance, the collateral that was accretive to a new deal was transferred.”
Palmer Square’s deal, which S&P says has a lower total leverage (9.22x) and weighted average cost of debt that other recent peer CLO offerings, will have a two-year non-call period. The weighted average spread is 3.38%.
Palmer’s deal helped bring new-issue CLO volume to more than $26 billion on the year, compared to $17.4 billion in the first three months of 2017, according to JPMorgan.
