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More CLOs may be called as loan prices rally, cash to equity drops

The recent rally in loan prices has prompted equity investors to start exercising calls on CLOs, with potentially more on the way if the current upswing continues.

So far, two CLO 2.0s have been called this year, both in April. This follows 13 2.0 optional redemptions in 2015 and six in 2014 In total, 10 CLOs have been called this year, following 89 in 2015, 85 in 2014, and 75 in 2013, according to J.P. Morgan.

This year’s called 2.0 transactions are the Mill Creek CLO from 40/86 Advisors and Babson 2011-I, both of which were originally issued in 2011.

When looking at the factors that increase the likelihood of a call, analysts at Nomura determined that higher equity net asset values (NAVs), higher costs of funding, and lower cash flows to the equity increase the likelihood that a CLO gets called. Analysts at J.P. Morgan also cited the equity purchase price, loan sourcing conditions, and the type of investor holding the equity are additional factors.

The Mill Creek CLO, which is 15 months past its reinvestment period, saw average quarterly payments to its equity over the past few years of under 3%, well below the average CLO 2.0. Its most recent equity NAV was about 48% though, which is in the 82nd percentile across all 2.0s, according to data from Nomura analysts.

The Babson 2011-I, which is 19 months past its reinvestment period, similarly saw its average quarterly distributions to the equity fall to 2.9%, from 5%, while its NAV was around 44%, which is within the top quarter of CLO 2.0s.

Looking ahead, Nomura analysts see another nine CLO 2.0s past their reinvestment periods that are candidates for an optional call since their quarterly equity distributions have fallen by 1.2% or more and their equity NAVs are above 36%.

Analysts at J.P. Morgan believe that a sustained rally in loan prices could lead to more CLO 2.0s getting called since the call also provides an exit for some of the equity that has exchanged hands over the past few months.

The entire CLO 1.0 universe is otherwise past its non-call and reinvestment periods at this point. The 2006 vintages were over half of the total CLO 1.0s called last year followed by the 2007 vintage. Over the next few years, J.P. Morgan analysts anticipate that the 2007 vintage will take over as the most actively called. Typically CLO 1.0s that were called in 2015 had 32% of the original transaction size outstanding and were about three years past the end of their reinvestment periods.

The same goes for Europe
In Europe too, some expect improved secondary loan market prices to trigger more CLO redemptions. In its April 8 European Asset-Backed Barometer, Deutsche Bank Markets Research suggested several other deals issued in late 2005/2006 that may become economical to call, including Wood Street II (Alcentra), Green Park 2006-1 (Blackstone), Boyne Valley CLO (via AIB Capital Markets), and Theseus 2006-1 (Invesco).

There has been a marked increase in loan BWIC activity in both the U.S. and European secondary loan markets in recent weeks, some of which may related to CLO redemptions, sources said. Through April 8, 14 European BWICs totaling €744 million have been put up for sale, versus €1.2 billion from nine BWICs in the same period last year, according to LCD data. That’s a 56% increase in deal count over last year, although the volume figure trails by 40%. Meanwhile, in the U.S., there has been a flurry of BWIC and OWIC activity as well, with the amount of loans put up for sale via BWICs through April 8 standing at $5.5 billion, up from $1.6 billion in the year-ago period. CLO 1.0 redemptions have driven these portfolio sales.

Three European CLOs have been called so far in 2016, including BNPP IP’s Leveraged Finance Europe Capital IV, Versailles CLO M.E.I, and Dalradian European CLO IV. In 2015, LCD tracked 28 call notices, with 26 issued by CLO 1.0 transactions and two by CLO 2.0s. The most recent European CLO BWIC was for a pending CLO redemption from a large, established manager. — Andrew Park/Sarah Husband

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Assets at US Leveraged Loan Funds Grow for First Time Since July

loan fund assets under management

With leveraged loan prices surging in the secondary market in March, loan mutual funds’ assets under management grew by $2.54 billion during the month, to $109.64 billion, according to S&P Global Market Intelligence LCD.

This is the first time that loan fund assets under management have grown since July 2015, and it’s the largest increase since February 2014.

That being said, essentially all of March’s increase can be attributed to secondary market gains, rather than a groundswell of interest in the asset class from retail investors. – Kerry Kantin

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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JPM Survey Finds Growing Investor Interest in CLO Mezzanine Debt

A recent survey by analysts at J.P. Morgan found that investors see the best relative value in the mezzanine tranches of CLOs, especially when compared to other asset classes.

In a poll of 110 of the firm’s clients, almost 70% of respondents saw the best relative value in CLOs when compared to other asset classes such as commercial mortgage-backed securities (CMBS), high-yield loans, asset-backed securities (ABS), high-yield bonds, and residential mortgage-backed securities (RMBS). None of those other asset classes had more than 15% of respondents saying they saw the greatest relative value in those areas.

Within CLOs, respondents expressed the greatest interest in picking up BBBs, BBs, and equity in the secondary. About 15 saw the best relative value in BBBs, more than 25 in BBs. This marks a shift in sentiment from the first quarter when only two investors saw the greatest value in BBBs and about 12 in BBs. More than 40 investors indicated they plan to add more CLO mezz or subordinated debt to their holdings over the next six months, greater than any other quarter going back to the third quarter of 2014.

Investor concerns outside of the energy and commodities names seem to primarily be focused on the retail sector as about 50 respondents expressed the greatest concerns there,  more than triple the number who were most concerned about healthcare or technology. Retail names make up about 6.7% of the collateral in CLO 2.0s.

Of the 110 respondents, nearly half came from insurance and money management firms, which analysts believe reflect the makeup of the broader CLO investor base. Hedge fund investors were the second largest respondents following money managers. — Andrew Park

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This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Young Exits Och-Ziff to Co-Found New Alternative Asset Manager

Don Young has left his position as managing director at Och-Ziff Capital Management to establish a new asset management firm, according to market sources.

Young will join forces with Mike Damaso and Jay Garrett as co-founders of the new firm, which will be a diversified alternative asset manager (including CLOs), and which is expected to launch later this year, according to market sources.

Eldridge Industries is a key investor in the new firm. Eldridge also acts as a holdco for Security Benefit.

Young has worked at Och-Ziff since September 2013, and previously has held positions at Octagon Credit Investors and Primus Asset Management. Damaso was previously chairman of the investment committee overseeing corporate credit investing and a portfolio manager for the NZC Guggenheim Fund. Garrett was previously at Matlin Paterson. — Sarah Husband

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This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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US CLO Issuance Rises to $4.2B in March as Market Steps Cautiously

US CLO issuance

U.S. CLO issuance picked up to $4.2 billion in March from $2.07 billion in February and from a paltry $827 million in January, according to S&P Global Market Intelligence LCD.

While the March number is far inside 2015’s monthly average of $8.16 billion, it shows that the CLO trade is not dead yet. Year to date U.S. collateralized loan obligation issuance stands at $7.1 billion, compared to $30.8 billion in activity at this point in 2015.

Obviously, 2016 issuance will not match last year’s $98 billion, which was the second-most on record, behind the $124 billion in 2014. In fact, a host of CLO analysts revised lower their already-tempered 2016 full-year volume predictions after the market’s tepid start in January. The consensus now calls for roughly $55 billion in issuance this year. – Staff reports

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This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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LCM Prices $381M Risk-Retention Compliant CLO, Bringing YTD Issuance to $5.43B

Deutsche Bank today priced a $381.06 million CLO for LCM Asset Management, according to market sources.

The transaction is structured to comply with U.S. risk retention by retaining horizontal slice of over 51% of the equity.

Pricing details for the transaction are as follows:

LCM CLO 2016-03-18

The CLO will close on April 22 with the non-call period running until April 20, 2018 on all the tranches except for the Class C and D. Those two tranches have non-call periods running until Oct. 20, 2018.

The reinvestment period will end on Oct. 20, 2020 with the legal final maturity on April 20, 2028.

Year-to-date issuance is now $5.43 billion on 13 CLOs, according to LCD data. March’s total is $2.53 billion from six transactions. — Andrew Park

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Introducing a New CLO Market Publication from LCD

S&P Global Market Intelligence LCD has a great new weekly publication detailing global CLO activity.

Each edition of the CLO Weekly Review will feature

  • Commentary/analysis of market activity, in both the U.S. and Europe
  • Global issuance/outstandings data, current and historical
  • U.S./European CLO pipelines
  • Recently priced CLOs, U.S. and Europe
  • CLO Dashboard, featuring market stats for both the U.S. and Europe
  • LCD’s Loan Snapshot, detailing broad trends in the U.S. and European leveraged loan markets

You can view or download the most recent CLO Weekly Review here.

To learn more about the Weekly, LCD, or to subscribe, you can email Marc Auerbach. Or call him: 212 438-2703.

CLO weekly

 

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Deutsche, Wells Fargo Revise U.S. CLO Issuance Estimates Following Conference

Analysts at Wells Fargo and Deutsche Bank have lowered their U.S. CLO issuance forecasts for this year following this week’s ABS Vegas conference.

Wells Fargo on Wednesday lowered its year-end projection to $60 billion from $75 billion, and Deutsche Bank yesterday lowered its projection to $45–50 billion from $70 billion.

CLO issuance-estimates-revised2

Both banks follow earlier downward revisions from Bank of America Merrill Lynch, J.P. Morgan, and Nomura.

Wells Fargo cited lower loan issuance and the decline in demand for the equity tranches as the reasons for their revision.

Some investors have even lower expectations for issuance, according to a survey by Deutsche Bank analysts last week who surveyed 85 different investors. About 50% of respondents thought issuance would be between $30–50 billion this year; 20% were more optimistic at $50–60 billion; while 5% were very pessimistic, expecting under $30 billion in issuance for the year. – Andrew Park

A summary of the current yearly CLO projections:

  • Bank of America: $45 billion
  • Deutsche Bank: $45–50 billion
  • Morgan Stanley: $60–70 billion
  • Wells Fargo: $60 billion
  • Barclays: $70–80 billion
  • Nomura: $40 billion
  • J.P. Morgan: $35–$45 billion

 

Compared to the original forecasts:

  • Bank of America: $70 billion
  • Deutsche Bank: $70 billion
  • Morgan Stanley: $60–70 billion
  • Wells Fargo: $75 billion
  • Barclays: $70–80 billion
  • Nomura: $70 billion
  • J.P. Morgan: $60–$70 billion

 

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here
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QCLO (Qualified CLOs) Bill Passes House Financial Services Vote

The Barr-Scott bill (H.R. 4166) passed a vote by the House Financial Services Committee yesterday, by 42 to 15. Ten democrats joined the bill. The Bill seeks relief from risk-retention regulation for qualified CLOs. To access the bill, click here.

The bill now passes to the full House for a vote, and assuming it is approved there, it will then move to the Senate. Given the strong bipartisan support received at yesterday’s vote, there is every likelihood that the bill passes out of the House and on to the Senate, but as has been the case with previous CLO-regulation-related bills, securing approval from the Senate is a much more challenging prospect, sources said.

The QCLO was developed by the LSTA and other trade associations – working with members – and is subject to tests in six categories. Assuming the CLO meets all the tests, the manager can purchase and retain 5% of the CLO equity, rather than 5% of the value of all the notes. — Sarah Husband

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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Crestline Prices $359M Risk Retention-Compliant CLO; That’s 5 Deals in February

BNP Paribas today priced a $358.84 million CLO for manager Crestline Denali, according to market sources.

The pricing details of the transaction are as follows:

Crestline Denali will serve as the originator and retention holder of at least 5% of the equity tranche to comply with European risk retention.

The transaction will settle on March 30 with a non-call period of a little over two years after and a reinvestment period of slightly more than four years.

Year-to-date issuance is now $2.9 billion from seven CLOs. February issuance is now $2.1 billion from five CLOs, according to LCD data. — Andrew Park

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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