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Amid High-Yield Market Flight, US CLO Parade Marches On

Investors continued to flock to the leveraged loan asset class in March, with a steadily rising base rate – LIBOR – and expectations of additional Fed rate hikes in 2018 drawing ever-more cash into the floating rate environment.

One of the biggest sources of demand for leveraged loans – collateralized loan obligations – just wrapped up another banner quarter, with $32.1 billion of new CLOs issued, according to LCD. That’s nearly twice the amount seen during the same period a year ago. During all of 2017, U.S. CLO issuance totaled an impressive $118 billion, easily surpassing expectations at the start of the year and nearing the record $124 billion in 2014.

One reason the leveraged loan market is seeing sustained institutional investor interest now: three-month LIBOR, the rate on which these credits traditionally have been based, has risen some 62 bps since the start of year, buoying yields in the segment, even as the spread over LIBOR has decreased, due to the amount of cash flooding into the market. (Issuers today also can have the option to switch to one-month LIBOR, which has risen less markedly than the three-month rate.)

Indeed, while U.S. loan funds and ETFs have seen a net inflow of roughly $3 billion in 2018, investors have withdrawn roughly $15.5 billion from high yield bond funds this year, according to Lipper. High yield bonds, of course, over investors a fixed rate of return, as opposed to leveraged loans, which are priced at a spread over LIBOR.

CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. Since the financial crisis their prominence in the U.S. leveraged loan market has grown, with CLOs accounting for roughly 65% of all loans syndicated during 2018’s first quarter, according to LCD.

At the end of March U.S. leveraged loan market outstandings totaled $994 billion, according to the S&P/LSTA Loan Index. – Tim Cross

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European CLO Issuance Sees Record First Quarter

european CLO issuance

CLO issuance in Europe for the quarter through March 20 is €5.45 billion, and with a further two transactions likely to close out before quarter-end, 1Q18 would be the busiest first quarter of a year ever for this market, according to LCD.

It would also be the second-largest quarterly new-issue volume in the post-financial crisis “CLO 2.0 era” (the largest such tally is €7.7 billion, recorded in 4Q17).

These are important numbers for the leveraged loan asset class, as CLOs comprise a critical part of the investor base, in both Europe and U.S., often driving activity in that sector.

Of course, as more investors pile into the global CLO market – eyeing what historically have been relatively rich returns – spreads on these deals have dwindled, often testing record lows throughout 2017, and into 2018. – Staff reports

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CLO Issuance Eases in January After Stellar 2017

US CLO issuance

The U.S. CLO market, which finished 2017 on a surprisingly strong note, downshifted in January, though issuance in the segment easily topped that seen in the year-ago period.

There were $6.34 billion of collateralized loan obligations vehicles last month, less than any month in 2017 – except the $980 million in January. Issuance for all of 2017 totaled $117.75 billion, according to LCD.

That number was surprising, with some market expectations at the start of 2017 at roughly half that amount, as the U.S. CLO market entered its first full year under the risk-retention requirement, courtesy Dodd-Frank. That rule mandated that CLO managers retain at least 5% of their CLO vehicles, as opposed to selling them off in their entirety.

As opposed to hindering the market, however, CLO issuance took off, including some $7 billion issued specifically with risk-retention in mind, according to industry estimates.

CLO issuance in 2018 is expected at broadly the same levels as in 2017, according to LCD’s Andrew Park.

CLOs are a crucial part of the leveraged loan investor base, as they comprise roughly 60% of deals brought to the U.S. syndications market, according to LCD. Right now, there is roughly $970 million outstanding in the U.S. leveraged loan market, according to the S&P/LSTA Index. – Tim Cross

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Surpassing expectations, 2017 US CLO Issuance Nears Record Levels

Issuance of collateralized loan obligation vehicles in the U.S. topped $118 billion in 2017, according to LCD, easily topping market expectations at the beginning of the year.

Indeed, due to risk retention guidelines enacted via Dodd-Frank – which mandated that CLO managers retain at least 5% of a CLO, as opposed to selling off the entirety of the vehicle to investors – the market consensus had CLO issuance slumping dramatically last year, to $55-60 billion, by some estimates.

That proved not to be the case, however, as the relatively attractive returns provided by CLOs in the current yield-starved capital markets was attractive to investors. In fact, during 2017 there was roughly $7 billion in CLO issuance created specifically with risk-retention in mind, according to market estimates.

CLOs comprise roughly 60% of the U.S. leveraged loan investor base. At year-end, there was some $960 billion of U.S. leveraged loans outstanding, according to the S&P/LSTA Index. – Staff reports

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Led by CLOs, Institutional Investors Grab Unprecedented Share of 2017 Leveraged Loan Market

Propelled by first-half cash inflows into loan funds and surprisingly robust CLO issuance throughout the year, institutional investors grabbed an unprecedented share of the U.S. leveraged loan market in 2017. All told, institutions accounted for 90% of primary allocations this year—excluding those taken by deal arrangers—up from 88% in 2016, according to LCD. The institutional investor dominance was consistent in 2017, ranging from 89% of allocations in the first quarter to nearly 94% in the fourth.

Quarterly CLO Volume 2017

One thing that drove institutional investor market dominance this year: U.S. CLO issuance has topped even the most optimistic predictions made at the beginning of 2017, when the specter of risk retention hung heavily over the market. In the year to date, $115.9 billion of CLO vehicles have priced (including $33.8 billion in the fourth quarter), easily topping the $72.3 billion full-year total in 2016.

Of course, as CLO issuance remains in high gear, that investor component gobbles up market share. So far this year, CLOs account for 64% of institutional loan allocations, up from 62% in 2016 and from 50% in the wake of the financial crisis in 2009.

CLO Share of Institutional Market

What’s more, as the segment continues to heat up and investors get more comfortable around the CLO asset class, the market for U.S. CLOs has expanded from a clubby group of asset managers, hedge funds, and banks to now include insurance companies and pension funds across the U.S., China, Korea, Japan, and Australia. — Staff reports

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Ellington Prices $453M Vehicle, Capping Off – Maybe – Suprising Year for US CLO Market

Citi today priced a $452.8 million CLO for Ellington CLO Management, according to market sources. This is the second CLO to be issued from the manager, which debuted in April.

The manager is retaining a horizontal slice to comply with risk retention in the U.S.

Pricing details are as follows:

Ellington_CLO_2017-12-18

The transaction will close on Jan. 30, with the non-call period running until Feb. 15, 2020, and the reinvestment period ending on Feb. 15, 2021. The legal final maturity is on Feb. 15, 2029.

Year-to-date new issuance is now $116.35 billion from 208 CLOs, according to LCD data. New issuance in December is now $8.14 billion from 16 transactions. — Andrew Park

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With Busy November, European CLO Issuance Hits Post-Crisis Record

european CLO issuance

November issuance has pushed European CLO volume to a  post-crisis high, amid record tight liability spreads.

The market has grown to €18 billion through November, thereby eclipsing the previous post-crisis  record of €16.8 billion, set in 2016, according to LCD. Moreover, the final 2017 volume total could rise above €20 billion, as more managers are lining up deals before year-end.

Putting the €18.1 billion new-issue volume into perspective, 2007 saw the peak of pre-crisis European CLO issuance, according to S&P Global Ratings, which rated 71 CLO transactions worth €35 billion that year. And comparing the CLO market to loans, 2017 institutional loan volume stood at €96 billion as of Dec. 1 (the annual record is €111 billion, set in 2007).

Much of this year’s loan volume stems from opportunistic borrowing, however – largely refinancing of existing debt – with M&A-related activity at just €35.7 billion this year, versus €70.2 billion in 2007. Refinancings add no new money into a yield-starved investor market, and in hot markets, such as today, the end result of these deals is decreased return for investors already involved in the transaction.

For more info on CLOs and how they work check out LCD’s online Loan Market Primer. – Luke Millar

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Fortress Prices $586M CDO, to invest in Leveraged Loans, High Yield Bonds

GreensLedge Capital Markets LLC today priced a $586.1 million CDO for FDF Management LLC Series III, according to market sources. The manager is an affiliate of credit funds for Fortress Investment Group. This is the first such transaction this year from the manager who previously issued a similar structure last May.

The manager will retain a horizontal slice to comply with risk retention in the U.S.

Pricing details are as follows:

Fortress CDO 2017-11-29

Up to 35% of the portfolio must be invested in senior secured loans and a maximum of 65% can be invested in second-liens and/or unsecured bonds, sources said.

The transaction will close on Dec. 20 with the non-call period running until Jan. 25, 2020 and the reinvestment period ending on Jan. 25, 2023. The legal final maturity is on Jan. 25, 2036. — Andrew Park

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Hungry For Yield, Sovereign Wealth Funds Target Red-Hot CLO Market

For years, the market for U.S. CLOs (collateralized loan obligations) has mostly been limited to a clubby group of asset managers, hedge funds, and banks participating in the often arcane, private syndicated loan market.

But as the segment continues to heat up – CLOs now hold some $450 billion in outstanding leveraged loans – that club has opened to insurance companies and pension funds across the U.S., China, Korea, Japan, and Australia, as investors grow more comfortable around the CLO asset class, after it perhaps unfairly received negative attention following the 2007-08 financial crisis, thanks in part to a phonetic similarity to CDOs (collateralized debt obligations).

US CLO issuance

Issuance of collateralized loan obligation vehicles in the U.S. this year already has surpassed full-year 2016 activity, and is on pace for some $110 billion, making it the second-busiest year ever for the market.

To be sure, there’s a big difference between the two. CLOs are special-purpose vehicles established to hold and manage pools of leveraged loans. Such credits are secured, and historically experience a relatively high recovery in cases of default (you can read more about CLOs in LCD’s Loan Primer). CDOs, of course, are structured vehicles whose assets, shortly before the financial crisis, were often based on sub-prime mortgages.

In recent years, the investor base for CLOs has expanded rapidly, to some of the most coveted and prominent pools of capital worldwide, namely sovereign wealth funds across the Middle East and Asia.

Funds that have invested with CLO managers or have expressed interest so far entail some of the world’s largest, including the $828 billion Abu Dhabi Investment Authority, the $359 billion Singapore GIC, and the $900 billion China Investment Corp., according to market sources. Spokespeople for those firms declined to comment on their investment plans.

Because a number of those entities do not have the in-house expertise or the pre-existing relationships to access CLOs in the new-issue market, sovereign wealth funds have instead been getting involved as limited partners in the risk retention funds of CLO managers that purchase the equity. The risk retention rules under Dodd-Frank currently require CLO managers to retain at least 5% of the market value for each transaction, and in response, a number of managers have gone out to fundraise for the new entities that will provide capital towards complying with the rule.

“We’ve met with a number of sovereign wealth funds, and it’s pretty clear that they already have had multiple meetings with a number of the larger CLO managers in the space,” one CLO manager said.

GoldenTree Asset Management, for example, has raised capital from 20 different investors in the U.S., Europe, and Asia-Pacific, for its $600 million risk retention vehicle, of which a few sovereign wealth funds participated.

Two sovereign wealth funds were also involved in one private equity firm’s fundraise of over $500 million for its risk retention fund earlier this year, sources said.

And in a sign of how the risk retention rules have actually broadened the investor base, half of that fund’s investors were first-time investors in the CLO market.

The move from these funds, which were formed to reinvest their government’s savings or proceeds from excess oil reserves, comes as a number of them have indicated interest in allocating greater amounts to alternative asset classes, especially as their returns have declined following the compression of yields across other asset classes over the years.

For example, the Abu Dhabi Investment Authority (ADIA) has stated in its most recent annual review that it would seek direct investments in private equity and alternative assets after its returns have been falling the past few years. Its rolling 20-year returns declined to 6.1% last year, from 7.6% in 2012, according to the company’s annual report. In addition to its Alternative Investments Department that it formed last year to co-invest in special situations alongside its external managers, ADIA launched its Emerging Opportunities mandate to invest in asset types outside of its normal realm this year.

Temasek, which is owned by the Government of Singapore and which manages around $275 billion, has also found other ways to get indirect exposure to private credit and CLOs via its 5% equity stake in €12.6 billion AUM French credit manager Tikehau Capital last year. Temasek’s rolling 20-year returns have also followed the same pattern, declining from about 15% in 2012 to 6% last year.

CLO equity typically annualized can return anywhere between the low teens to high 20s, and in 2016 averaged about 18.34%, according to data from J.P. Morgan analysts. — Andrew Park

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Fortress Prices $1.5B Middle Market CLO

Natixis Securities Americas LLC today priced a $1.5 billion middle market CLO for FCOD CLO Management LLC, according to market sources.

The manager is retaining a horizontal slice to comply with risk retention in the U.S. The manager will also comply in the European Union via the originator route.

Pricing details are as follows:

Fortress CLO 2017-11-01

The transaction will close on Nov. 15, with the non-call period running until Nov. 15, 2019, and the reinvestment period ending on Nov. 15, 2021. The legal final maturity is on Nov. 15, 2029.

Year-to-date issuance is now $96.76 billion from 172 transactions, according to LCD data. This is the first new issue in November.

CLOs (collateralized loan obligations) are special-purpose vehicles set up to hold and manage pools of leveraged loans. — Andrew Park 

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