Quiet November CLO primary persists; CCC tranches eyed as buckets get bigger

By Rebecca Melvin

New York, Nov. 18 – The CLO primary market remained quiet on Wednesday as has been the trend for November so far. To say it has been muted is putting it mildly, Deutsche Bank analyst Bjarni Torfason wrote in a research note published Wednesday.

Torfason’s tally of new CLO issuance included only five deals for a little more than $2 billion in value.

Among November’s deals have been the $411 million Galaxy XXI CLO Ltd./Galaxy XXI CLO LLC, the $409 million Avery Point CLO VII, Ltd./Avery Point CLO VII, Corp. and the $412 million KKR CLO 13 Ltd./KKR CLO 13 LLC, according to Prospect News data.

Secondary market activity has also been slower in November, with the weekly bid list volume about $400 million this month compared to $600 million per week in October, Torfason said.

Meanwhile, CLO spreads are wider, with Torfason saying both the AAA level as measured by the average funding cost of the entire structure as wide as they have been since at least late 2011 and early 2012. Further widening has been seen of late in the middle of the capital structure.

Generically, the current new issue spread for a AAA tranche is about 160 basis points over Libor, the AA tranche is 230 bps, the BB tranche has a 800 bps spread generally, and a B has widened out to 1,000 bps, according to Deutsche Bank statistics.

As the collateral has deteriorated, the CCC bucket has been growing, Torfason wrote. And thus it becomes significant in that it affects overcollateralization tests, and the prices of assets in that category are key to the evaluations.

“The importance of the CCC bucket is that its size is restricted, usually to 7.5% of the total collateral, and sometimes 5%. Any amount of CCC/Caa assets in excess of the limit affects the par calculation of the CLO’s total collateral for overcollateralization tests,” Torfason wrote.

As these buckets are on the rise, it will be important for CLOs that have already experienced general collateral deterioration as pricing of those assets will affect overall health of the CLOs.

© 2015 Prospect News.
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