CLO market in wait-and-see mode amid broader market volatility; Palmer Square CLO prices

By Rebecca Melvin

New York, July 7 – Activity in the primary and secondary markets for collateralized loan obligations has been significantly curtailed as a result of macroeconomic tensions related to the Greek debt crisis and the correction in China’s stock markets, an informed source said on Tuesday.

“It’s fair to say that as a consequence of Greece and China, things have slowed substantially,” the source said.

The secondary market was essentially moribund and pricing was obtained for only one CLO new issue.

Palmer Square Capital Management LLC priced $408.15 million of notes due July 20, 2027 in a CLO of eight tranches. Of the two AAA-rated tranches, one has a floating-rate spread of Libor plus 150 basis points and the other small, fixed-rate tranche was priced at a rate of 3.338%.

In addition, Prudential Investment Management Inc. was reported to have priced a CLO in the last few days with a spread of Libor plus 140 bps for the top-rated tranche.

Pricing details for the Prudential CLO could not be obtained by Prospect News’ deadline. But a source said that it was likely that the CLO was only able to get done in the current market environment because Prudential is a very well-known manager.

Given the slowdown in the secondary market, it was difficult to assess how much the market has been affected by widening spreads in high yield and leveraged loans.

“Things don’t trickle down that fast,” a source said, adding that there is concern about what is happening in commodities, and weakness there will likely be a drag on the CLO market.

“There is a lot of concern about what is happening in the commodity world. But at the moment, we are at a bit of a standstill,” the source said.

“We are also in wait-and-see mode regarding how Greece shakes out and how China does,” he said.

In the broader markets, stocks reversed early losses to close in positive territory. Bonds were up again, but only slightly higher.

Stocks seemed to stage their swing from sharp losses to gains after the S&P 500 stock index bounced off a technical marker.

Greece and its creditors remained locked in a stalemate, with Athens still seeking emergency funding while creditors demand budget cuts and other changes that the Greek voters rejected on Sunday.

In China stock markets have been in a slide since June 12. Since its peak on that day, the Shanghai Composite index and other indices are down more than 25%.

China’s government has attempted to stop the bleeding with various measures. Over the weekend, it suspended initial public offerings and established a market-stabilization fund to spur stock purchases. The Chinese central bank also pledged to provide funding to support brokerages’ margin finance operations that allow investors to borrow cash to buy stocks. On Tuesday, the Shanghai market ended down another 1%.

On June 27, the Chinese central bank had cut interest rates by 0.25% and loosened some banks’ reserve requirements.

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