Investment-grade CLO spreads predicted to continue to compress in 2018; Golub CLO prices

By Rebecca Melvin

New York, Dec. 14 – The spreads on high-grade CLO notes are predicted to continue to compress in 2018 as investors’ hunt for yield remains a theme, especially those rated AAA to BBB, Fitch Ratings said in a report.

Spreads on notes issued by broadly syndicated loan CLOs have declined during 2017, with BBB-rated issues seeing the biggest compression within investment-grade securities.

Spreads on AAA-rated CLO notes, which represent the bulk of issuance, or 62% median contribution in Fitch-collected data, have declined on average by over 35 basis points through 2017, data shows.

AA and A level notes, which are around 11% and 6% of issuance, respectively, have had spreads contract nearly 40 bps and 102 bps on average.

Average BBB note spreads have compressed by more than 145 bps over the year, though it is a small overall contribution to the total structure, at around 5% of issuance, according to Fitch.

Lower spreads benefit managers by making CLO liabilities cheaper, and some investors are trading down the credit rating spectrum to preserve yield levels.

At current spread levels, these notes are still perceived as offering relative value versus other asset classes and clearing the market even at these lower levels, Fitch says. Managers and equity investors have been able to use that demand and refinance CLOs for profitable arbitrage.

Meanwhile 2017 new issuance is high at roughly $100 billion through the end of November. In addition refinancing and resets have amounted to $121 billion of activity.

“The spread compression on the liabilities side of the CLO balance sheet accommodates spread compression for the underlying collateral. Leveraged loan issuers are also flocking to the market in search of better pricing and friendlier terms, emboldened by the favorable supply and demand dynamic,” Fitch Ratings said.

About 66% of gross loan issuance volume for 2017 has been comprised of refinancings and repricings, according to data from Thomson Reuters.

Investors have been attracted to CLO notes for their relatively appealing yield and historically low default rates. However, without investors' willingness to accept lower spreads on CLO notes, CLOs would have a hard time indulging leveraged loan issuers' demand for repricings, and the impact on the broader market would be considerable, Fitch said.

Golub Capital CLO prices

Opal BSL LLC priced a $508.53 million CLO offering of notes due 2031, according to a market source.

Golub Capital Partners CLO 22 (B)-R/Golub Capital Partners CLO 22 (B)-R LLC sold $320 million of class A-R senior secured floating-rate notes (//AAA) at Libor plus 118 bps; $52 million of class B-R senior secured floating-rate notes at Libor plus 150 bps; $33.5 million of class C-R senior secured deferrable floating-rate notes at Libor plus 185 bps; $32 million of class D-R senior secured deferrable floating-rate notes at Libor plus 270 bps; $22.5 million of class E-R senior secured deferrable floating-rate notes at Libor plus 600 bps and $48.53 million of subordinated notes in the equity tranche.

The CLO will be managed by Opal BSL LLC.

The CLO has a two-year non-call period and a five-year reinvestment period.

The notes are backed primarily by first-lien senior secured small and medium enterprise and broadly syndicated corporate loans.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.