LPC: CLO volume hits 2016 high in October on increased demand

Blackstone Loan Financing

03/11/2016 16:45

By Kristen Haunss 
    NEW YORK, Nov 3 (Reuters) - Sales of Collateralized Loan 
Obligation (CLO) funds hit a monthly high of US$8.4bn in October 
and was the biggest month of issuance since June 2015, as 
increasing demand from new investors helped to boost issuance 
before looming regulations. 
    GSO Capital Partners, the credit investment arm of 
Blackstone Group, and Carlyle Group were among firms that issued 
CLOs in October with some of the tightest spreads this year. CLO 
tranches offer higher interest rates than other investment-grade 
products, which are attracting investors facing negative yields 
elsewhere.  
    "The increase in volume in the market is reflective of 
investor confidence in US senior secured credit and continued 
worldwide appetite from new investors in the US and Asia for 
attractively priced floating-rate assets," said Tom Majewski, 
founder of Eagle Point Credit Management, which invests in the 
equity and junior debt of CLOs. 
    Despite the recent pickup in volume, issuance for the year 
to date is just US$55.3bn, 36% lower than the same period in 
2015, according to Thomson Reuters LPC Collateral, as the market 
gets ready to implement risk-retention rules in December that 
require managers to hold 5% of their funds. Volume has also been 
depressed by a dismal January when only two deals were arranged. 
    The last two months have been a bright spot with October's 
issuance preceded by US$8.24bn in September, which was the 
second biggest month of the year, according to the data. 
    Investors looking at the CLO market are attracted to Triple 
A tranches that pay 142bp, compared to a similarly rated 
five-year, non-agency commercial-mortgaged backed security for 
58bp as of October 24, according to Wells Fargo data. 
    There is currently strong demand from investors across the 
capital structure, said Sajid Zaidi, head of US secured lending 
and CLO new issue at Morgan Stanley in New York. 
    "Some investors that had taken a pause late last year have 
come back into the market and that has been a factor in driving 
new issuance," he said. 
    Increasing investor interest is driving spreads on the most 
senior tranches lower, which can help boost payments to equity 
investors in the most junior and riskiest part of the funds, who 
are paid last with whatever is left over after CLO bondholders 
receive their distributions. 
    This is a welcome development as equity distributions have 
otherwise been falling as Libor rises because most loans have a 
Libor floor, a minimum interest rate borrowers must pay 
investors, while CLO tranches do not. While the amount that CLOs 
must pay their debt investors increases, the amount of interest 
received stays the same. 
    CLOs pool loans of different credit quality and sell slices 
of the fund of varying seniority, from Triple A to B to 
investors including insurance companies. 
    The influx of new investors has pushed spreads on Triple A 
debt, which is the largest and most senior portion of the fund, 
tighter. Triple A spreads averaged 143bp on October 28, down 
from a 2016 high of 161bp in June, according to Morgan Stanley 
data. 
    A GSO CLO that priced with BNP Paribas in the first week of 
November had the tightest pricing for a non-static deal this 
year, sources said. The US$357.5m Triple A slice of the Bristol 
Park fund pays investors a spread of 142bp over Libor. 
    Momentum due to the tightening in liability spreads and 
looming risk-retention helped to boost CLO issuance in October, 
said Brad Rogoff, head of credit strategy at Barclays.  
 
 (Reporting by Kristen Haunss; Editing by Tessa Walsh) 
 ((Kristen.Haunss@thomsonreuters.com;)) 
 
Keywords: CLO VOLUME/