Kingsland Capital originally planned to bring its seventh CLO to market in August; it lined up a credit facility in the late spring that would allow it to gradually accumulate the collateral over the following two months.
But by mid-May, a selloff in broadly syndicated loans had left them very attractively priced in the secondary market, and Kingsland’s investors were already lined up. So the manager decided to strike while the iron was hot. It was able to sell the $472 million Kingsland VII before acquiring any collateral, though it had identified half of the loans that it wanted to acquire, according to a presale report published by Moody’s Investors Service.
Instead of warehousing this collateral, it used proceeds from the sale of the notes to quickly acquire the loans. By the time the deal closed within a few weeks, it was 50% ramped.
“We had intended to put a warehouse in place, but we had our investors lined up and the market gave us the opportunity, so we decided to go forward,” said Joyce DeLucca, a managing principal at the firm she founded in 2005.
“We didn’t need the extra time to ramp up the deal,” she said.
Below investment grade loans continued to sell off over the summer, yet few managers have followed Kingsland’s example of “printing and sprinting.”
That may seem surprising, particularly since so there were so many print and sprint deals completed in July and August of last year, when loan prices were similarly attractive.
In late August, Wells Fargo CLO analyst Dave Preston opined in his weekly newsletter that continued withdrawals from bank loan mutual funds – the other big buyers in this asset class – could result in so many “print-and-sprint” transactions that the resulting supply of CLO notes could put pressure on CLO spreads.
In the six weeks through Sept. 2, bank loan mutual funds and exchange traded funds saw a total of $3.5 billion walk out the door, according to data compiled from Lipper.
The resulting selloff in loans as fund managers liquidated assets to fund redemptions pushed prices down an average $0.92 during August, according to JPMorgan. By the end of the month, the percentage of loans on the JPMorgan Leverage Loan Index trading below 99.00 had surged from 15.8% to 32.4%.
That would seem to indicate a widespread availability of bargain loans, but market observers say a dive in the details reveals some distinct differences from the last sell-off period that spurred a print-and-sprint trend.
But the bargains are concentrated in loans to companies in the energy and metals/mining sectors, where the risk of default is currently much greater. Many CLO managers are keeping their distance from those loans, but still have confidence in loans in other sectors.
Eagle Point Capital Management managing partner and founder Thomas Majewski said that demand for loan investments is “bifurcated” between continued CLO manager demand for non-energy related loans and the avoidance of anything to do with oil and gas. “In general, we would expect to have very few energy and metal/mining and sector loans, which is where the bulk of the price movement has been lately,” Majewski said.
That is unlike last year, when “the contagion from oil and gas started to pull down the rest of the market, and you had a better, broader buying opportunity” for CLOs, said DeLucca.
Concerns about oil and gas exposure aside, there are also significant risks to printing and printing a CLO.
The biggest risk is that price of loan that a manager has targeted change after the CLO notes have been issued. There’s also the risk that the manager won’t find enough assets to acquire by the deal’s closing date, or that investors will back out of deals due to uncertainty about CLO spreads.
If equity investors feel the spreads may start tightening in the higher priority AAA tranches, for example, that could lease to drastically decreased returns for the subordinate tranches when it’s their turn to take a slice.
That risk of uncertainty is what makes print-and-sprint deals often fail to materialize, DeLucca says. “You have to have your equity in place and your AAA in place, and you have to at least have a good sense of where to go with the mezzanine, because otherwise the equity [investor] would never sign off on it,” she said.
“Print and sprint is about being market opportunistic. It’s not an easy deal to put together.”
Another factor weighing against a print and sprint trend is the wider availability of warehouse lines from major banks. These lines of credit allow for more certainty on the pricing of the underlying loans since assets are locked into the portfolio prior to the issuance of notes.
Print-and-sprint became a necessity when warehouse lines were hard to come by in the years following the financial crisis. But warehousing came back into vogue in 2014, when according to a report last year from Moody’s, approximately 80% of CLOs – including middle-market offerings – were launched with a warehouse facility.