Leveraged loan market observations, California edition: Demand, bubbles, record CLOs

On my annual August West Coast swing I was privileged to have many informative discussions with our friends on the buy-side — including at Los Angeles’ Chavez Ravine, while watching Clayton Kershaw lead the Dodgers to a win over the Angles. What follows is a summary of the insights I was able to glean, which I pass along with as little editorializing as possible.

The buy-side is in the drivers seat
Clearly, managers have adjusted to today’s new normal, in which they are able to control pricing discussions. The reasons are well known. To summarize: Hot money is out of the asset class, for now. Retail flows are negative. High yield accounts are selling. And institutional investors have pulled in their horns for the same reason as have retail investors – a combination of bad press, duration fatigue and the overall risk-off posture of the market.

Bubble trouble?
There’s a broad consensus that terms and conditions are stretched, and debt multiples are pushing into an uncomfortable zone. Will there be another default spike in the years to come, as a result? Of course. Credit cycles have existed since the ancient Sumer civilization supposedly invented debt 3,500 years before Christ.

Given the solid economic outlook, however, an organic catalyst seems like a remote possibility in the near term. That does not dismiss an exogenous shock that sinks the global economy into recession (there are plenty of flash points around today to make such a risk more than idle). But even in that case most issuers can eat out of their own refrigerator, at least for a time, as a result of wide coverage ratios.

Underwriting calendar/CLO warehouses
One big way managers observe that the current period is far different than 2007 is a lack of overhang. Naturally, there is a wide array of CLO warehousing, but warehouse lines are far less vulnerable — from a bank’s perspective — because of large first-loss positions required of equity investors. As well, the underwriting calendar today of roughly $40 billion in M&A loans is a fraction of the roughly $350 billion that loomed over the market – and banks’ liquidity – when the fecal matter hit the rotor device in 2007.

A record year of $100 billion is in the book already, managers say, based on the year-to-Aug. 11  total of roughly $79 billion. The number could go a lot higher — perhaps upwards of $125 billion — given managers’ ability to source sub-par paper in the secondary, and the decent flow of new-issue on tap.

Retail flow
This will remain mostly negative until there’s some meaningful pick-up in rates. That said, 2015 could be a huge year for inflows if the Fed does, as expected, finally start raising rates.

Institutional mandates
Pension funds and other institutional investors have put the brakes on credit, and what mandates are in process are of the “go-anywhere” variety, that allows managers’ discretion to invest across products and regions.

To sum it up, I’d say for CLO managers these seem to be the best of times. They would not like to see further deterioration that would scare equity investors from the field. But the current state of play is highly conducive to ramping and printing deals (as the volume numbers attest). As for retail managers and those hunting for institutional mandates, it is not the worst of times, by a long shot. But it could be better.


CLO roundup: US/Europe see second busiest week, pricing nine CLOs

The CLO markets have definitely not gone fishin’ this month. Last week was the second busiest week of the year globally, with $5.11 billion of volume across nine new CLO transactions. The U.S. priced seven deals, and Europe churned out two more, leaving global volume at $89.86 billion in the year to date, according to LCD. The busiest week globally this year is the week ended June 6, when $7.2 billion of new CLO transactions priced.

Players do not expect more deals to price out of Europe this month. But activity is likely to resume quickly in September, with Carlyle and 3i expected to be among the first out of the blocks, according to market sources. With 15 managers and more working on new deals, the autumn market could be crowded, so managers will want to ensure decent air time among investors by getting deals out promptly.

LCD subscribers can click here for full story, analysis, and the following charts:

  • US Deal pipeline
  • European arbitrage CLO issuance and institutional loan volume
  • European Deal pipeline

– Sarah Husband


Oaktree prices $703.35M CLO via Mitsubishi UFJ Securities

Mitsubishi UFJ Securities has priced a $703.35 million CLO for Oaktree Capital Management, according to market sources. The cash-flow transaction, Oaktree EIF II Series A1, was upsized from $655 million.

The deal is structured as follows:

Of note, the transaction includes a ¥37.042 billion special purpose entity – Repackaged CLO Series OT-A1 – which will function as a balance guarantee currency swap in connection with a portion of the senior notes, according to the S&P presale. The AAA-rated SPE will issue Japanese yen-denominated notes, and is backed by the dollar-denominated notes issued by the CLO. Mitsubishi UFJ Securities has arranged this SPE.

The CLO will have a two-year non-call period, a four-year reinvestment period, and the final maturity is Aug. 15, 2025.

It includes a springing bond bucket and a 65% cov-lite bucket, according to the S&P presale.

This latest pricing takes the number of U.S. CLOs managed by Oaktree to five. The manager priced a $516.5 million CLO in January via Citi, and its debut European CLO via Barclays in May.

Including Oaktree’s deal, issuance in the year to date rises to $78.5 billion from 144 deals, while seven deals have priced in August for $4.14 billion. – Sarah Husband


CIFC Asset Management hires Andrews from RBS, preps next CLO

CIFC_logoMatt Andrews will join CIFC Asset Management as a managing director in the Capital Markets & Distribution team next week, according to market sources. He was previously head of CLO structuring at RBS.

CIFC last week priced a $626.5 million CLO via Morgan Stanley, and plans to price its fifth new-issue transaction in the coming month via Citi, according to sources.

Meanwhile, it has also priced a refinancing of CIFC Funding 2012-1, via Citi, sources said. – Sarah Husband



Leveraged Loans: 2014 European CLO issuance tops full-year 2013 total

EUR CLO issuance 2014-08-06

European CLO issuance in the year to date has reached €7.7 billion following the two recent pricings from ICG and Avoca Capital (subscriber links). This year’s supply has now eclipsed the €7.4 billion issued for the whole of 2013, and puts the market well on track to meet analysts’ full-year supply forecasts of €10-15 billion. – Sarah Husband


CLO roundup: Still churning – ICG restarts Euro supply; US momentum continues

It may be August but still the CLO market is still churning out new transactions, with the recent secondary weakness presenting a buying opportunity for managers ramping up deals. Five new deals priced last week in the U.S. for more than $3.5 billion, while Europe broke its five-week drought with a new pricing on Friday. As a result, global volume in the year to date rises to $84.75 billion, according to LCD.


YTD U.S. CLO issuance has topped $74.77 billion from 138 deals, according to LCD, making last year’s $45.64 billion from 94 deals in the same period look meager.

LCD subscribers can click here for full story, analysis, and the following charts:

  • US arbitrage CLO issuance and institutional loan volume
  • European arbitrage CLO issuance and institutional loan volume
  • Deal pipeline

– Sarah Husband


Ares prices $1.26B CLO via J.P. Morgan; July US CLO issuance tops $12B

.P. Morgan has priced a $1.2607 billion CLO for Ares Management, according to sources.

The transaction, which is the asset manager’s third new-issue deal to price in the U.S. this year, is structured as follows:

The deal includes a roughly two-year non-call period and a four-year reinvestment period. The legal final maturity is in August 2025.

With Ares’ deal, CLO issuance in the year to date rises to about $73.2 billion across 135 deals, according to LCD. In July, 21 deals have priced totaling $12.2 billion. – Kerry Kantin 



Phoenix-like CLO market takes another turn in the loan spotlight

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.

LCD subscribers can click here to read full story, analysis, and charts, including:

  • CLO volume
  • CLO market history
  • European CLO volume

– Steve Miller

Follow Steve on Twitter for an early look at LCD analysis, plus market commentary.


July CLO market: $10B in U.S. issuance, and counting …

global CLO volume
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.


Prudential prices $666.5M CLO via Credit Suisse; 16th US deal to price in July

Credit Suisse today priced a $666.5 million CLO for Prudential Investment Management, according to sources. The deal was upsized from $615.25 million.

The deal, which is the asset manager’s third new-issue CLO to price so far this year, is structured as follows:

With Prudential’s deal, CLO issuance in the year to date grows to $69.56 billion across 130 deals, according to LCD. In July, 16 deals have priced totaling $8.59 billion. – Kerry Kantin