CLO Managers Favor November’s Costly Knowns Over 2019’s Unknowns

As the market could be riskier early next year with supply lining up, CLO managers are willing to take the plunge now rather than waiting for the new year’s issuance window.

Source: Bloomberg

It’s been an expensive month to price new collateralized loan obligations in Europe. But the fear of what lies ahead is spurring some managers to take the plunge now rather than wait for next year’s issuance window.

A hefty pipeline of deals is lining up to price next year so competition for investor attention could be fierce. And while current market conditions aren’t overly friendly, they might be even worse in January given Brexit-related uncertainty. Added to this, managers with fuller warehouses say it’s better to issue now than to risk waiting especially as prices on loans in the portfolio soften.

In view of this, Barings (UK) Ltd, Brigade Capital Europe Management and Partners Group (UK) Management Ltd decided to stomach higher funding costs on their new deals by issuing during the volatility. Last week’s risk-off market saw spreads balloon at the bottom of the liability stack even as spreads on triple-A notes held relatively steady.

At the lowest-rated single-B level, CLO spreads moved from the mid-800s basis points on transactions pricing in mid-November to 900 basis points on the most recent new issues. During volatile periods, low-rated CLO notes can come under pressure as hedge-fund investors play off relative value against high-yield bonds, and falling secondary bond prices can also weigh on double- and triple-B CLO spreads.

Bearing Witness
Barings’ syndicated triple-A tranche came tight versus the week’s other deals as arranger Credit Suisse Securities (Europe) Ltd tapped into strong demand for this established issuer, resulting in an over-subscription, according to a person familiar with the matter.

Yet the impact of wider spreads further down the liability stack can still be seen in the vehicle’s funding costs.

  • Barings’ overall funding cost was 191 basis points (based on fixed and floating rate coupons), with its syndicated triple-A notes pricing at 98 basis points
  • In October Five Arrows Managers LLP also printed syndicated triple-A notes at 98 basis points but had a lower funding cost of 179 basis points. Funding costs are based on the weighted average adjusted fixed and floating rate spread, according to Bloomberg data
  • Selling pressure has seen CLO secondary market spreads widen over past two weeks by 5 basis points for AA tranches, 20 basis points for A, 40 basis points for BBB, 50 basis points for BB and 60 basis points for B, Deutsche Bank ABS analysts wrote in a Nov. 18 research note
  • Triple-A anchored tranches have priced at 96 basis points throughout the month, with syndicated triple-As pricing between 100-102 basis points, Bloomberg data show