Over its 25-year history, the CLO product has been written off as dead, or at the very least hobbled, at least twice: (1) in the wake of the early-2000s default spike, and (2) after the 2008 credit crunch, when the entire structured-finance market came under intense regulatory scrutiny. Over the past 12 months, however, CLO technology has proved resilient yet again, and in fact is thriving like never before. For one thing, the number of managers that printed a new vehicle over the past 12 months increased to 101, from 92 in 2013 and 66 a year earlier. Further, the current figure is within sight of the all-time high of 110, from 2006.
Issuance in the U.S. CLO market continued apace last week, even with August right around the corner. Four new-issue deals priced, totaling some $2.21 billion, with more expected this week. With no new deals pricing in Europe, global CLO issuance year to date stands at $80.6 billion.
This chart is part of a longer LCD analytical story, available to LCD News subscribers. It includes charts detailing U.S. arbitrage CLO issuance vs. U.S. institutional loan volume, the U.S. CLO deal pipeline for what’s left of July, a European CLO deal pipeline, and European arbitrage CLO issuance vs. European institutional loan volume.
After a slow start, the U.S. CLO market churned out another five deals last week totaling some $2.26 billion, thanks to a burst of activity late in the week. With no deals printing in Europe, global issuance stood at $78.40 billion through Friday, July 18.
Last week’s new-issue action included a print from yet another first-time manager, Steele Creek Investment Management. With this print, the number of first-time managers pricing deals this year grows to 11.
This is S&P Capital IQ’s monthly loan market update. In this post, we concentrate on the trends at work in the European leveraged loan market during 2014 so far, including an increase in M&A financing and some signs of heating in the market. We’ll also touch on the question of whether some slowdown is to be expected.
Out of the €45 billion of leveraged loan issuance so far this year, M&A-related deals contributed €25 billion, more than double what was raised in the first half of last year. This total was boosted by some jumbo corporate M&A deals, most recently the cross-border financing for Jacobs Douwe Egberts. Among sponsor-backed buyouts, LCD tracked an increase in the number of asset sales by corporates and families, bringing some welcome debut borrowers to the loan market.
Institutional investors continued to show strong appetite for leveraged loans during the second-quarter, and heavy repayments on existing loans spurred them on. In fact repayments reached a record quarterly high of €16.6 billion, based on the S&P European Leveraged Loan Index, as the chart shows.
Adding to institutional demand, there was lively issuance of new-generation CLOs, particularly during June, including some new managers entering the 2.0 market, and sources say the pipeline for further CLO issuance in the second half of the year looks healthy.
Through much of the year so far, there has been relatively little complaint from buyside firms about leverage multiples, and indeed first-lien leverage is pretty much flat on last year at around 3.7 times EBITDA. But second-lien tranches are appearing more frequently, and this helped drive total leverage a little higher, to 4.9x. Some arrangers argue leverage is unlikely to spiral up and up because this would result in deals coming to market with low single-B ratings, these often being hard to shift in syndication.
Instead, the market is showing its aggression in other ways – particularly in the use of covenant-lite loans. €10 billion of cov-lite paper – a record – has been raised this year, meaning that roughly one in three euros sold to fund managers had no maintenance covenants. The ELLI Index now includes a 13% cov-lite portion, the highest in its history – although a long long way behind the U.S., where the trend started.
However, from the point of view of yields, Europe looks less aggressive than it did earlier in the year as this chart suggests. Behind the scenes, yields on domestic European deals were flat from the first quarter to the second. But in line with the weaker technical picture in the U.S. market, cross-border yields widened in recent months, dragging the average out too.
Looking ahead, some kind of summer slowdown is likely, but arrangers say they are pitching on some aggressively structured deals and will be looking out for signs of pushback among investors if terms get too heated.
Over the past week, the pipeline of CLOs in various stages of the rating process but for which final ratings have not yet been assigned decreased to $7.92 billion, from $9.59 billion last week, according to a report from S&P’s Structured Finance Ratings Group (LCD subscribers please click here for PDF).
J.P. Morgan launched today the J.P. Morgan CLO Index (CLOIE). CLOIE offers total returns and analytics based on observable pricings of a representative pool of bonds following a stated methodology, and is published daily.
The index holistically captures the USD-denominated CLO market, representing over 3,000 instruments at a total par value of US $236.1 billion. It will allow market participants to track securitized loan market valuations, and complements last year’s debut of the J.P. Morgan Asset-Backed Securities Indices (ABS Indices).
CLOIE tracks floating-rate CLO securities in 2004–present vintages. Additional sub-indices are divided by ratings AAA through BB, and further divided between pre- and post-crisis vintages. CLO 2.0, or post-crisis vintages, include deals issued in 2010 and later. CLOIE utilizes a market-value weighted methodology and will be another member of the widely used J.P. Morgan benchmark suite.
J.P. Morgan clients and investors can access index levels and statistics for the CLOIE at jpmorganmarkets.com.
Pricing for the index is provided by PricingDirect Inc., a valuation vendor and affiliate of J.P. Morgan Chase Bank. – Sarah Husband
Traditionally the third quarter tends to be the least active of the year for the CLO market. As yet, however, there is no sign that issuance is taking a break for the summer, with five new U.S. CLOs pricing and another four in the near-term pipeline. Europe is also not quite done, with several more managers said to be eyeing a print before the end of July. Global volume YTD stands at $76.13 billion, according to LCD.
Stateside, a comparison between this month’s issuance and last year neatly sums up the ongoing strength of this year’s new issue market. At $5.67 billion with two and a half weeks yet to go, July 2014 supply has put July 2013’s full month supply $3.37 billion in the shade.
At $66.64 billion from 124 deals, according to LCD, issuance to date is currently fourth in line to the title of largest annual tally ever behind 2006 ($97.01 billion), 2007 ($88.94 billion), and 2013 ($82.61 billion). By comparison, YTD issuance in 2013 was $43.69 for 89 deals.
LCD subscribers can click here to get full story, analysis, and the following charts:
Global CLO Volume
Deal Pipeline, US and Europe
European arbitrage CLO issuance and institutional loan volume
J.P. Morgan yesterday priced a $770.3 million CLO for Octagon Credit Investors, according to market sources. The closing date is Aug. 12, 2014.
The transaction is structured as follows:
It has a two-year non-call period, a four-year reinvestment period, and a 12-year final legal maturity.
It is the manager’s second new issue CLO to price this year, having priced Octagon XIX in March via Wells Fargo. The manager also priced a $321 million refinancing of Octagon XII in April via Citi.
Including Octagon’s transaction, issuance in the year to date rises to $66.17 billion from 123 deals, according to market sources. July issuance stands at $5.2 billion from 9 deals. This compares with $3.37 billion from eight deals in July 2013. – Staff reports