January 25, 2019 / 8:27 PM / 6 months ago

CLO spreads widen as managers price first deals of the year

NEW YORK, Jan 25 (LPC) - US Collateralized Loan Obligation (CLO) spreads are at the widest level in about two years as the first funds of 2019 priced this week.

GoldenTree Asset Management raised a US$807.8m CLO that includes a US$476m Triple A slice, the most senior and largest portion of the fund, which pays investors 130bp over Libor, according to a source. KKR raised a US$402m CLO with a US$247m Triple A piece that pays 136bp, a second source said.

Triple A spreads have been widening, jumping from some fund pricings in the low 90bp range in March through May to a December coupon high of 133bp, according to LPC Collateral data. Spreads were last this wide in early 2017.

“Everyone has been waiting for the first prints of the year to see the direction of Triple A spreads,” according to Rishad Ahluwalia, JP Morgan’s London-based head of CLO research.

JP Morgan in November forecast Triple A spreads would reach 130bp-140bp this year, but in a January 11 report introduced a downside 2019 CLO Triple A target of 160bp-170bp.

The forecast is “wider than in prior weak periods this cycle (140bp-160bp) on our perception of more challenging liquidity and elevated market swings,” the analysts wrote in the report.

The US$586bn US CLO market is the largest buyer in the US$1trn US leveraged loan market, according to LPC Collateral data. A record US$128.1bn of US CLOs was arranged last year, surpassing the previous high point of US$123.6bn set in 2014, according to the data. The funds help companies including retailer Party City and American Airlines finance their operations.

CLOs pay debt investors a spread over Libor with the leftover interest paid to holders of the most junior portion of the fund, the equity. So as Triple A spreads increase, distributions to equity can decrease. This disconnect is exacerbated by borrowers cutting their interest payments – more than US$389bn of institutional loans was refinanced last year, according to LPC data – paying less to the funds.

Only US$5.7bn of US CLOs was issued in December down from US$13.1bn in November, according to LPC Collateral. It was the slowest month since January 2017, just after the Dodd-Frank risk-retention rules took effect, requiring managers to hold part of their fund. A US Appeals Court ruled in 2018 that the funds are exempt from the regulation, which helped boost new deal volume.

It was a slow start to January with no funds pricing in the first three weeks of the year, as many firms waited to see where spreads would shake out

But this week the market reopened and along with the GoldenTree and KKR deals, PGIM priced a CLO with a one-year reinvestment, ArrowMark Partners priced a static CLO and CBAM priced a deal with a three-year reinvestment, according to sources.

Typical CLOs, including GoldenTree’s, often have a two-year non-call period and a five-year reinvestment.

Reporting by Kristen Haunss Editing by Jon Methven

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