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High-grade CLO paper sees strong demand, tighter spreads; lower-rated tranches mixed
By Cristal Cody
Tupelo, Miss., May 18 – CLO deal volume is beginning to pick up, while spreads are continuing to improve in May on strong demand for investment-grade paper, sources report.
“At current spread levels, IG bonds appear 15-40 [basis points] rich vs. corporates based on past spreads relative value,” BofA Securities, Inc. analysts said in a note released on Monday.
Some of the drivers behind the outperformance has included managers raising sufficient cash to deploy into CLOs and increased downgrade risk of BBB rated bonds from the investment-grade index, according to the note.
BWIC volume totaled $919 million for the past week ended Friday, up from $747 million in the prior week.
“Spreads tightened across the capital stack except for CLO Bs which remained unchanged from last week's levels,” the analysts said.
CLO AAA-BBB spreads tightened by 10 bps to 25 bps week over week “as money managers continued to deploy fresh capital,” according to the report.
CLO BBs tightened by 50 bps on the week.
“The recent tightening attracted real and fast money sellers across the capital structure and investors continue to prefer top-tiered managed deals and/or cleaner credit profiles,” the BofA Securities analysts said.
CLO AAAs were quoted ending Friday 10 bps better on the week at an average Libor plus 190 bps.
BB tranches improved 50 bps to a Libor plus 1,175 bps average, while B-rated spreads were flat at Libor plus 1,550 bps.
On Friday, trading volume remained strong in high-grade CBO/CDO/CLO paper with $430.3 million of issues traded at an average 93.70, improved form 91.20 on Thursday, according to Trace data.
Average prices on lower-rated securities softened to 58.90 on Friday from 71.30 in the prior session on trading volume of $136.88 million.
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