Refinancing Dominates CLO Market Again in March

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Refinancing activity dominated the CLO market again in March, as some 50 deals totaling $20.5 billion repriced their securities, while another five totaling $2.8 billion reset their reinvestment periods. This took year-to-date refinancing and reset volume to $49.5 billion, according to Thomson Reuters LPC.

By comparison, new issuance of collateralized loan obligations amounted to $8.3 billion from 15 deals in March, up marginally from $8.1 billion (via 15 deals) in February. That brought total new issuance for the first quarter to $17.4 billion.

Unlike last year, when managers rushed to refinance before rules took place requiring managers to keep skin in the game of deals, most CLO refinancings this year have been driven by a desire to lower interest rates. Under a No Action Relief letter obtained by Crescent Capital Group, CLOs issued prior to Dec. 24, 2014 that meet specific conditions can refinance once without triggering the need for risk retention.

CLOs are looking to lower interest rates on their liabilities in large part because interest rates on the leveraged loans in their portfolios are falling. The spreads that loans pay over the benchmark Libor rate narrowed to an average 344 basis points in the first quarter from 363 basis points in the prior quarter, according to Thomson Reuters.

Leveraged loan issuance surged in the quarter to $345 billion, but as in the CLO market, activity was driven primarily by refinancing activity – which represented 76% of volume - as borrowers took advantage of market technicals to cut spreads.

The top three sectors in terms of loan issuance this year are technology, financial services and telecom.

Five borrowers defaulted in March, with $4.1 billion of institutional loan debt.  The largest were Ocean Rig UDW Inc. ($3.1 billion), Answers Corp. ($500 million) and EXCO Resources Inc. ($382.8 million). This brought institutional loan default volume to $7.7 billion in the first quarter, of which $3.8 billion is from energy companies. The trailing 12-month leveraged loan default rate is now at 2%.

With new CLO supply scarce, discount margins on triple-A rated notes tightened further in March, to an average of 127 basis points. The tightest AAA discount margin was at 122 basis points.

In the European CLO market, four new issues totaling €1.6 billion priced in March, taking year-to-date volume to €2.8 billion from seven deals.

European leveraged loan issuance was $48 billion in the first quarter, with refinancings representing over two-thirds of deal flow and new money volume at $16 billion. That’s down from $22 billion in new money issuance in the fourth quarter of 2016 and $23 billion in first quarter of last year.

Assets under management stand at $446 billion for U.S. CLOs, while European CLOs are at €67 billion.

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