CLO issuance quiet following busy prior week; strong jobs report points to boost in loans

By Rebecca Melvin

New York, March 9 – The CLO primary market was quiet on Monday following a busy calendar last week for new issues, sources said.

“U.S. CLO managers are finding March to be much more hospitable than January, with more than $3 billion priced thus far this month,” Wells Fargo Securities analysts Dave Preston and Jason McNeilis, wrote in a note published Friday.

Managers have also been able to upsize deals, indicating that CLO demand is increasing, Preston and McNeilis wrote.

There were nine CLOs priced last week, including eight U.S. CLOs and one euro deal for $4.9 billion in proceeds.

For the year to date, there have been $19.1 billion of new U.S. issuance in 35 deals, or $21.8 billion on 41 deals, globally.

However a dip in loan supply could put a crimp in CLO issuance going forward.

According to LCD data, year-to-date institutional loan issuance is down almost 60% compared to the same period last year.

CLO formation may be hindered until loan supply improves, J.P. Morgan Securities’ analysts Rishad Ahluwalia and Jacob Kurosaki wrote in a note published on Friday.

Nevertheless, Friday’s blockbuster February jobs report revealed a strong 295,000 payrolls added and the unemployment rate fell two ticks to 5.5% last month. That means loans may be due for an increase as they follow Treasuries higher, the analysts said.

The 10-year Treasury yield is already 60 basis points higher since the end of January, and the strong jobs report reinforces the case for a Fed rate hike in June, Ahluwalia and Kurosaki wrote. “Still loan fund flows have yet to show a big swing to consistently positive territory.”

Friday’s data, however, “again puts the bid for floating-rate paper back in investors’ minds,” Ahluwalia and Kurosaki wrote in their note.

CLO spreads tighter

The trend toward tighter CLO spreads continued last week. U.S. CLO AAAs tightened from the mid Libor plus 150 bps range in January to Libor plus 150 bps for the tightest. That is due partly to the dearth of new manager prints, Ahluwalia and Kurosaki wrote.

“We did not expect AAAs to come in this much given strong supply, but as we expect less supply in the second half, we think sourcing paper could prove difficult. We reiterate our year-end AAA forecast of Libor + 135-140 bps, but see upside risks to our forecast,” the analysts wrote.

In the secondary market, energy-related tiering “persists,” but the inflection point where investors begin to focus is in BBs. Factoring in tiering and energy exposure in the 2014 vintage, BBBs are trading in the area of 400 bps to 505 bps, compared to 640 bps to 775 bps for the BBs, the JPMorgan analysts wrote.

BB spreads have tightened as much as 50 bps this year.

But a continuation of higher supply that poured in last week may preclude further tightening.

Loan market weak

In contrast to the loan market, high-yield issuance for the year to date is up by almost 20%, according to the Wells Fargo analysts.

High-yield issuance in February 2015 was almost double the volume in February 2014.

“We believe the lack of loan supply (especially compared to the large amount of high-yield issuance) reflects a combination of regulatory pressure on the loan market and preference for the high-yield market over the loan market,” the analysts said.

The lack of loan supply has contributed to the strong loan price rebound. LCD’s average flow name bid has increased almost 2 points in 2015, which should be helping CLO equity investors watching market value NAVs.

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