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Western Asset braves new CLO world with more conservative terms

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Longstanding CLO manager Western Asset Management just priced its first deal of 2020, and despite the transaction's much more conservative structure, spreads doubled from its deal a year earlier.

Led by Citigroup Global Markets, the $352.30 million broadly syndicated CLO, Crown City CLO I LLC, is divided into six tranches, comprising $210 million rated AAA, $56 million rated AA, $21 million rated single-A, $17.5 million rated BBB-, $10.5 million rated BB-, and $37.30 million unrated, according to a June 19 pre-sale report by S&P Global Ratings.

The transaction was collateralized by at least 95% senior secured loans, with covenant-lite loans limited to 65% of the collateral pool.

S&P says that transactions priced after the pandemic-induced recession are structured differently than those before. Since the recession began in late February, CLOs structures have become increasingly conservative, and the Crown City CLO reflects that trends.

The rating agency notes that compared to other broadly syndicated CLOs it preliminarily rated in the three months before May 31, Crown City has lower total leverage and higher subordination. S&P also notes the deal's lower weighted average spread as well as a lower scenario default rate and a lower weighted average recovery rate.

In addition, S&P says, Crown City has "risk mitigants" that were not typical before the recession or differ from recent deals. They include a shorter reinvestment period, a larger ratio of assets to liabilities, no class rated below BB-, and a lower scenario default rate, "which indicates a higher quality portfolio than most."

The last CLO issued by Western Asset was in July 2019. A significantly larger transaction of $925 million, the deal had four tranches, with $$784 million taken up by the AAA portion, and the lowest rated, BBB piece at $25 million, according to Finsight

The 40.00% credit enhancement for the AAA tranche of the recent deal is a major increase from the 2019 deal's 17.15%, and the lower rated tranches saw even more dramatic increases, according to Finsight.

Spreads on the Crown City deal also increased significantly across all the tranches, jumping to 205 basis points from 115 basis points last year on the AAA portion, and to 310 basis points from 160 basis points on the single-A piece, says Finsight, which as of June 17 hadn't verified pricing details.

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