The slow pace of new issuance is likely to compel CLO investors to accept even smaller risk premiums, according to participants polled at an industry conference Monday.
One of the most recent collateralized loan obligations to price came from PineBridge Investments, which will pay a spread of Libor plus 128 basis points on the senior, triple-A rated tranche.
Nearly half (48.9%) of respondents polled electronically at a CLO session of the Structured Finance Industry Group’s annual gathering in Las Vegas see triple-A spreads contracting even further, to Libor plus 125 basis points over lower.
And two panelists, Amit Roy, the head of new CLO issue at Goldman Sachs and Wynne Comer, a managing director at Bank of America, both expect triple-A spreads to be in the range of 100-110 basis points within a few months. "I think the thing that's held us back for so long is that a pretty small group of triple-A buyers were meaningful. We're definitely seeing that expand, and definitely seeing that grow internationally as well as domestically.
"I definitely think that with where loan spreads are, it means we can get close to 100 relatively soon," she said.
Some $30.7 billion of collateralized loan obligations were issued through Feb. 24, which would be a record, were it not for the fact that the vast majorities of these securities refinanced existing deals. Net new issuance, excluding the refinancing, was just $7.8 billion, according to J.P. Morgan.
In a report published Friday, the bank attributed the slow pace to several factors, including the difficulty sourcing loans to use as collateral. Leveraged loans are in such high demand from CLO managers and other kinds of investors that they are trading at the highest prices, as a percentage of face value, since May 2015. This, in turn, is prompting corporate issuers to reprice outstanding loans, compelling existing investors (including CLOs) to accept lower yields.
The lack of new CLO issuance is forcing CLO investors, in turn, to accept lower yields, as expressed as a spread over Libor, on new deals. This differential has contracted by between 17 and 123 basis points this year, depending on the riskiness of the notes.
The audience at another SFIG CLO session were also asked how high they expect CLO issuance to be this year, in light of rules that took effect in December requiring managers to keep “skin in the game” of their deals. Responses were fairly evenly split between $55 billion to $70 billion (46%) and over $70 billion (48%).
Asked how many different managers will be issuing CLOs this year, the vast majority (65%), chose between 60 and 75.