CLO market primary quieter, but strength expected to resume; investors eye repricings

By Rebecca Melvin

New York, April 22 – The market for collateralized loan obligations was quiet on Wednesday, extending Monday and Tuesday’s trend when many CLO managers and investors gathered in New York for the fourth annual IMN Investors’ Conference on CLOs & Leveraged Loans.

No new issues were heard to have priced, but the current pace of issuance isn’t expected to drop off from its elevated level of the first quarter, when about $35 billion of new deals priced, according to Prospect News data. IMN conference participants forecast $80 billion to $100 billion in U.S. CLO issuance for 2015.

Concurrently with the CLO market’s high level of new issuance, the loan market’s issuance levels have been depressed, a technical situation that has given rise to investor concerns about a potential increase in repricings.

While repricings may well rise, they haven’t yet done so in any significant way, Barclays U.S. Loans & CLOs research team wrote in a note published April 17. Even so, repricings generally alleviate the technicals that produce them, Barclays noted.

“On the demand side, repricings would make the CLO equity arb less attractive, which would lead to a reduction in investor demand and ultimately slow the pace of new structure creation,” the team wrote.

“While the leveraged lending guidance has undoubtedly affected M&A and LBO-related volume this year, tightening loan spreads may eventually attract other issuers to the market for cheaper financing to complement their high yield issuance,” the Barclays credit research team wrote.

Such a decision made by enough issuers would boost primary market volumes and lessen the current supply-demand imbalance, Barclays said.

Loan repricings tend to come in distinct periods, and deliver the blow of reduced spread compensation on top of the persistent scarcity of new issue paper. So far, however, an outbreak of repricings has not occurred. There have been only seven repricings totaling $3.6 billion so far this year, although four of those have priced in April, according to Barclays.

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