Resets and reissues dominated activity in the CLO market again in May, as managers extended the maturities or reinvestment periods of deals totaling $11.3 billion, while refinancing only $3.7 billion and issuing just $10.7 billion of new deals, according to Thomson Reuters LPC.
May's resets were down from $15.3 billion in April, and matched the previous high set in January.
Still, the cumulative pace of resets in the first five months of the year, $52 billion, is nearly as high as the $53.5 billion in new issuance of collateralized loan obligations.
Refinancings, which are mostly driven by cuts in coupon rates on CLO securities, have been “declining in popularity” for some time; the total for the year to date is just $13.2 billion, according to LPC.
A year ago, the refi vs. reset equation was inverted, with refinancings outpacing resets $68.5 billion to $12.7 billion – and ending the year with a market record for annual volume of $103.8 billion. Much of the refi activity was fueled by a one-time exception that allowed older CLOs to refinance without triggering a requirement for managers to hold skin in the game of their deals, under certain circumstances. The carve out was not available to managers that extended the terms of deals or upsized them.
Now managers are free from risk retention requirements, but many tied their hands on deals they already refinanced because language in the offering documents prohibits them from refinancing again or making many other changes. So instead, managers including HarbourView Asset Management, Tall Tree Investment and Carlyle Investment Management are issuing new deals with what are marketed as replacement notes that will be backed by the same collateral.
Spreads on CLOs remained unchanged month over month, with triple-A discount margins against averaging 103 basis points, according to LPC.
In Europe, new-issue CLO volume declined in May with just three deals printed totaling €1.3 billion. Year-to-date volume is €10.4 billion, down from €6.4 billion in the year-earlier period.
Issuance of U.S. leveraged loans syndicated to institutional investors increased slightly in May from April, but the year-to-date total of $366 billion is down 18%. As in the CLO market, most loan activity is driven by refinancing, a 70% share of loan issuance so far in the second quarter.