Rising Libor, floating-rate demand to help support CLO spreads; secondary market active

By Cristal Cody

Eureka Springs, Ark., Jan. 6 – CLO primary spreads ended 2016 tighter than 2015 levels, and several factors should help continue that trend in the near-term market, according to a Wells Fargo Securities, LLC report on Friday.

“In both the primary and secondary markets, U.S. CLO spreads ended 2016 much tighter than 2015 year-end levels, with investment grade tranches at or just wide of three-year tights,” Wells Fargo analysts said in the note. “We expect strong technicals, rising Libor and increased demand for floating-rate assets to provide support for current spread levels in the near term.”

Average CLO AAA primary spreads were quoted at the start of the year at Libor plus 141 basis points, while AA-rated tranches were seen at Libor plus 190 bps and A spreads are Libor plus 260 bps.

On Friday, the three-month Libor yield rose 1 bp to 1.01%, according to a market source.

In the securitized secondary market, trading has been active over the first week of 2017.

High-grade CBO/CDO/CLO issues totaling $117.71 million were traded on Thursday, compared to $296.6 million on Wednesday and $74.4 million on Tuesday, according to Trace.

The previous session saw $211.68 million of non-investment-grade securities traded, up from $154.42 million on Wednesday and $70.5 million on Tuesday.

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