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CLO Pipeline: Supply Continues Apace Despite Volcker Disappointment

The primary CLO market stayed busy last week, with LCD tracking seven new CLOs pricing in the U.S., for a total of roughly $3.56 billion, a touch inside last week’s $3.57 billion, which was the largest weekly new-issue tally of the year. Things were quieter in Europe, with Alcentra expected to be the next manager to print a European CLO several weeks down the line (see below). Global issuance for the week stood at $3.56 billion, according to LCD.

Part of this past week’s supply likely results from arrangers and managers wanting to clear the near-term decks ahead of the pending Easter break, as well as the IMN’s Third Annual Investors’ Conference on CLOs and Leveraged Loans, taking place in New York on April 22-23. As a result, new CLO pricing activity could take a breather over the next couple of weeks.

Still, with this past week’s impressive tally, YTD issuance through April 11 has now overtaken last year’s supply over the same period, at $29.77 billion versus $26.92 billion, according to LCD. It’s the first time in 2014 that issuance has run ahead of last year, following a quieter-than-usual January.

Again supply came from a mix of established platforms, as well as another brand new manager – Bradford & Marzec. Of note, Prudential’s jumbo $811.75 million CLO – the second largest cash-flow CLO transaction of the year behind CIFC’s $829 million CIFC Funding 2014-II – priced its AAAs inside 150 bps, at 148 bps (DM).

Halcyon Loan Advisors Funding 2014-2 is expected to price today via Citi, after all tranches except the BBs were subject by Friday. The same arranger is also looking to price a refinancing of Octagon Investment Partners XII for Octagon Credit Investors this week.

Meanwhile, Deutsche Bank is working on a $512.58 million CLO for Benefit Street Partners, while Steele Creek (via BNP), Aegon USA Investment Management (Jefferies), and Saratoga Investment Corp. (via Cohen & Co) are among those in the pipeline.

Across the pond
Europe’s next transaction may not appear until after the Easter break, with Alcentra likely to be the next out of the door in the next couple of weeks. Oaktree is rumoured to be three-to-four weeks away with its debut European CLO 2.0 (via Barclays), and behind that are Pramerica (via Barclays), 3i (via CS), Carlyle (via Citi), and Avoca (via Morgan Stanley).

YTD European CLO issuance stands at €3.02 billion, versus €600.5 million in the year-ago period, according to LCD.

Alcentra is working with J.P. Morgan on its second CLO 2.0 of the year, having priced an upsized €413.5 million CLO – Jubilee CLO 2014-XI – in January.

Both CLOs are structured via Rule 3a-7, which allows the Bank of New York-owned manager to retain bonds in the collateral pool while still exempting the vehicle from the final draft of the Volcker Rule.

Volcker moved back into focus this week after the Fed’s decision to grant banking entities two one-year extensions to the conformance period under the Volcker Rule, to July 21, 2017. The move minimizes the impact of the rule for 1.0 CLOs, as the vast majority of the current $135 billion CLO 1.0 universe is expected to have amortized or been repaid by then. However banks holding CLO 2.0 deals will still need to comply with the rule, which doesn’t permit them to own positions in CLOs that hold bonds.

In response, the LSTA said the two-year extension “does not solve the problem”. Market participants had been hoping for a more permanent fix, akin to that proposed by the legislation drafted by Rep. Barr, which would grandfather all CLO debt issued before Jan. 31, 2014. There’s speculation among some market participants that regulators won’t take any other actions regarding the Volcker Rule. As for the legislative route, sources say it would be difficult to get bipartisan support for the Barr Bill beyond the committee level, as Democrats have little or no desire to circumvent the regulators.

If the vast majority of the current $135 billion CLO 1.0 universe is expected to have amortized or been repaid by July 2017, the bulk of CLO 2.0s issued after 2009 (roughly $140 billion, according to Wells Fargo’s David Preston) could still be outstanding after July 2017.

Included among the possible solutions for this batch of CLOs with regards to Volcker compliance/exemption are refinancing, amendments to exclude bonds, bond removal from portfolios, inclusion of existing manager removal clauses (“for cause” removals and “key manager” clauses) as events of default, and as a last fix, waiving manager removal rights.

For European managers structuring deals as loan-only is a non-starter for most given the reliance of European CLOs on the bond market to boost collateral pools, so any that do need to structure Volcker-compliant deals will have to utilise 3a-7, or eliminate the ‘removal for cause’ clause for the controlling class, which would exempt the CLOs from Volcker.

But Europe generally has been more relaxed about structuring Volcker compliant/exempt deals, as aside from JPM CIO, U.S. banks do not tend to invest in European CLOs, and European investors appear less focused on liquidity, sources say. – Sarah Husband

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US CLO Market Sees Busiest Week Of Year

Issuers got right down to business as the second quarter got underway, with no fewer than five CLOs pricing in the U.S., along with one in Europe. In the U.S., week ending April 4th’s $2.75 billion supply total was the highest of the year, just topping the $2.7 billion issued in the week ended March 14, according to LCD. Week ending April 4th’s surge comes after March saw $11.15 billion of issuance, the highest monthly tally since May 2007, when $10.82 billion priced. Global supply for the week stood at $3.26 billion, including $514 million from European issuers, according to LCD.

Global supply for the week stood at $3.26 billion, including $514 million from European issuers, according to LCD.

Included among the offerings stateside last week were three broadly syndicated CLOs from established managers and two middle-market CLOs, as well as two refinancings (LCD does not count refinancings in its volume figures).

New CLO supply in the U.S. in the year to date stands at $25.38 billion, versus $26.61 billion during the same period last year, according to LCD.

In addition, CIFC Asset Management priced a $724.49 million CLO (CIFC Funding 2014-II) via RBS last Friday, which LCD has not yet included in its volume figures.

GSO/Blackstone was busy on both sides of the Atlantic, pricing Pinnacle Park in the U.S. and Holland Park in Europe. The former secured a tight print of L+150 on its AAA tranche, while the latter was the largest CLO to price in Europe this year.

The average U.S. AAA spread remains at 155 bps, so Pinnacle Park’s print was eye-catching. Expectations are that liability spreads will contract a little over the coming quarter, with a recent investor survey by J.P. Morgan indicating AAA spread expectations of L+135-155 and Wells Fargo’s David Preston predicting a tightening to L+140-145. Still, ongoing heavy supply will prevent too much tightening.

Any narrowing of liability spreads, along with softer secondary loan prices as retail investors’ enthusiasm for loans eases, would create a less challenging backdrop for CLO managers trying to ramp deals. But it would likely ensure that issuance remains heavy over the coming months. The pipeline certainly remains healthy, sources say, with more first-time managers looking to price deals over the next quarter.

Managers looking to price deals in the near term include:

  • GC Investment Management (Golub Capital Partners CLO 19B), via Citi (this week)
  • Bradford & Marzec (B&M CLO 2014-10, via Credit Suisse (this week)
  • Halcyon Loan Advisors (Halcyon Loan Advisors Funding 2014-2), via Citi (next week)
  • Telos Asset Management (Telos 2014-5 CLO) via BNP Paribas

Also in the pipeline are Steele Creek (via BNP), Aegon USA Investment Management (Jefferies), Saratoga Investment Corp. (via Cohen & Co).

Refinancings have been a big theme this year, and last week saw another two managers reduce their cost of funding, bringing the total number of CLO refis this year to six, according to LCD.

BNP Paribas priced a refinancing of all debt tranches of LCM Asset Management’s 2012-vintage LCM X transaction, reducing the coupon on the $259 million triple-A tranche to L+126, from L+148. And Citi priced a refinancing of all of the debt tranches of Invesco’s 2012-vintage Avalon IV CLO. The transaction reduces the coupon on the $231 million triple-A tranche to L+117, from L+150. The refinancing priced at par.

Across the pond
European issuance continued last week with GSO Blackstone’s Holland Park, via BNP Paribas. This transaction is GSO’s fourth European CLO 2.0, and it follows the €615.7 million Richmond Park, which priced via Citi in December.

Holland Park marks BNP’s return to the European CLO market, and it follows Goldman Sachs’ return last week, when it priced CVC Cordatus Loan Fund III for CVC Credit Partners. The addition of two more arrangers should be encouraging to those managers concerned about the relatively thin arranger base, which some blame for the slow feed of new deals to market.

But while the arranger base might be thin, investors in the European CLO market are also keen to see a more diverse manager pool. As a result, there was great interest in CVC Cordatus Loan Fund III CLO, which was structured via the originator method to comply with European risk-retention regulations. The originator structure is not new to the U.S. market, and it has been used by managers such as Canaras Capital Management, KKR, and Black Diamond, as well as by BDCs. But it is the first time a European manager has ventured from the more accepted sponsor route, and there are hopes that it could potentially open up the market to a broader number of European managers.

Notably, Saranac Advisory (Canaras Capital Management) just closed Saranac CLO II via Jefferies, which is another U.S. CLO to use the originator structure.

Including GSO’s deal, issuance in the year to date in Europe stands at €3.02 billion from seven deals, according to LCD.

Looking ahead, however, it could be a few weeks before the next pricing, sources say. Alcentra (via J.P. Morgan) could well be the next manager to print in Europe, making it the first to price two deals this year, sources say. Others targeting second-quarter deals are CELF Advisors (via Citi), 3i Debt Management (via CS), Avoca (via MS), and Oaktree (via Barclays).

– Sarah Husband

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YouTube video: April 2014 US leveraged loan market analysis

LCD’s video analysis detailing the U.S. leveraged loan market during March and 2014′s first quarter is now on YouTube.

The big story of early 2014 was robust M&A-related volume, which hit a post-credit crunch high of $62 billion in the first quarter. That, in turn, lifted total leveraged loan activity to $162 billion from a 15-month low of $127 billion during the final three months of 2013. Looking ahead, most players expect the market to remain relatively balanced.

This month LCD looks at:

  • S&P/LSTA Loan 100 Index
  • S&P/LSTA Index Loans Outstanding
  • Visible Inflows
  • Average New-Issue Clearing Yield of First Lien Loans
  • Loan Default Rate
  • M&A Institutional Loan Forward Calendar

The video is available here.

The URL:

Click here to download PDF slides of the video on Slideshare.

URL for the slides:

While you’re on YouTube please subscribe to LCD’s YouTube Channel. That way you’ll be certain not to miss any LCD videos. You can also subscribe by clicking on the link to the right of any LCD News email, or here:

http://www.youtube.com/user/LCDcomps

If you’d like to embed any LCD video on a web page or in other digital media, it’s simple via the “embed” button on the YouTube page for the video. You can also embed the slides via Slideshare.

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Small loan fund inflow keeps inflow streak going at 95 weeks

Retail-cash inflows to bank loan mutual funds and exchange-traded funds totaled $48 million for the week ended April 9, according to Lipper. Of the total, just 7% was tied to the ETF segment.

loan_flow_4.10_650

This is the lowest weekly total of the year, and it’s down from $127 million last week and $257 million two weeks ago. Retail-cash flows to the asset class have settled into a lower range following a hot start to 2014 as there hasn’t been a single weekly total above $700 million since January. Moreover, this is the lowest one-week reading dating back 75 weeks, to the week ended Oct. 31, 2012.

The four-week trailing average dipped to $190 million, from $321 million last week and $379 million two weeks ago. Still, the net inflow streak is now at 95 weeks, with a total of $66.7 billion over that span, by the weekly reporters only.

Year-to-date inflows total $7 billion, of which $1.08 billion is ETF-related, or 16% of the sum. In the comparable year-ago period, inflows were $15.1 billion, with 11% tied to ETFs.

The change due to market conditions was negative $77 million. Total assets stood at $109.6 billion at the end of the observation period, with ETFs comprising $8.4 billion of the total, or approximately 8%. – Joy Ferguson

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Fortune’s CLO criticism: The numbers tell a different story

In a story today, Fortune CNN Money takes the Federal Reserve to task for extending the deadline for banks to sell non-Volcker compliant CLO paper. The story itself is a polemic about the dangers that CLOs pose to the banking system. To back up this argument, the commentator, Cyrus Sanati, compares the potential losses of CLOs to those suffered by CDOs, which “imploded so spectacularly during the 2008 meltdown.”

There are several factual errors in the story. For instance, the story says, “But with Volcker set to go into force (officially) in July 2015, banks would not only have to stop creating CLOs now, they would also need to quickly sell off investments they have accumulated.”

However, while the rule would undoubtedly make it more challenging for banks to originate CLOs and, potentially, own CLO liabilities, there are regulator-approved fixes, such as structuring CLOs that are unable to hold bonds.

Also, the article says that “[f]or the last 94 weeks, there has been a positive inflow of cash into the CLO market.”

This figure is clearly a reference to retail inflows into U.S. loan mutual funds, not CLOs.

Those errata are, however, beside the point. The crux of what’s misleading about the Fortune piece is what amounts to this red herring:

“CLOs didn’t implode as badly as their CDO counterparts, so investors have gravitated to them over the last two years as a way to achieve outsize returns with no measurable increase in risk.”

The statement is technically correct, as far as it goes. In fact, CDOs had demonstrably worse performance in the downturn than CLOs. But saying that this constitutes different degrees of implosion is a statement that is grossly unfair. Here’s why:

According to S&P Ratings, the cumulative default rate on U.S. CDO obligations originally rated AAA (since 1996) is 14%; those include deals that bundled sub-prime mortgage backed securities. The comparable measure for U.S. cash-flow CLO liabilities originally rated AAA, by contrast, is zero.

What’s more, of the over 6,100 ratings issued by S&P on over 1,100 U.S. CLO transactions – including investment-grade and speculative-grade instruments – 25 tranches have defaulted, and had their rating lowered to D as a result.

Based on this, S&P calculated a 0.41% default rate, or just over four tranches for every 1,000 it has rated, across the entire debt stack. In either light, the CLO default experience hardly brings to mind an implosion.

Thus, the Fortune piece – by comparing CLO default rates with those of CDOs – is, in effect, calling an ant hill a lesser peak than Mount Everest. Again, this is true in the narrowest sense of the word, but specious with regard to describing the historical default experience of CLO liabilities. – Steve Miller