CLO primary quiet at start of 2017; Euro, U.S. CLO mezzanine spreads firm in secondary

By Cristal Cody

Eureka Springs, Ark., Jan. 9 – The CLO primary market continues to remain quiet in 2017 with January typically a light volume month, sources reported.

“Januarys have historically been slow months, averaging $2.8 [billion] in the U.S. since 2014,” J.P. Morgan Securities LLC analysts said in a note. “Our conversations with the CLO community in the New Year have been generally optimistic, as many see little impetus for the market to soften in the near term.”

New issuance is on the horizon, BofA Merrill Lynch analysts report.

“In the primary market, the first deal of the year has yet to appear, but reported pipelines indicate the potential for a busy upcoming period for both new issues and refinancing activity,” BofA Merrill Lynch analysts said in a note.

Secondary trading activity has been light, though spreads have tightened in the U.S. and European markets.

European CLO 2.0 mezzanine spreads have rallied about 25 basis points to 38 bps so far in 2017, according to JPMorgan.

“We think there is a bit more room to go, but would caution against chasing this too much tighter, with euro CLO BBs getting closer and closer to benchmark euro HY single-Bs,” the analysts said. “U.S. CLO junior new issue mezz looks cheap to HY, and with limited supply in January and secondary mezz which has tightened 40-200 [bps] since the middle of December, we think new issue U.S. CLO spreads could tighten near term.”

Euro BB bond spreads tightened about 50 bps in the first week of the year to Euribor plus 630 bps, while B spreads came in about 80 bps to 90 bps to Euribor plus 890 bps, according to BofA Merrill Lynch.

The European secondary market saw about €30 million of BWIC volume in the previous week.

About $92 billion of BWIC volume appeared in the U.S. CLO secondary market, according to the BofA Merrill Lynch note.

“Despite the light volume, bidding activity has been strong, as both asset managers and hedge funds seek to position for the new year,” the analysts said. “The bottom of the capital stack was particularly well bid. Spreads across the mezzanine tranches and the double-A tranche tightened [week over week] by 5-50 [bps].”

CLO AAA spreads were quoted flat at Libor plus 130 bps, while AAs firmed 5 bps to Libor plus 190 bps. B-rated tranches traded 50 bps better on the week at Libor plus 1,025 bps, the analysts said.

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