CLO AAA, AA spreads eyed to limit new supply; non-high-grade CBO/CDO/CLO paper rallies

By Cristal Cody

Tupelo, Miss., June 9 – CLOs are flat to better in the secondary market so far in June as spreads retrace the wides seen in March, sources report.

CLO primary AAA spreads were quoted averaging Libor plus 170 basis points, while secondary AAAs are trading at an average Libor plus 160 bps, according to a Wells Fargo Securities, LLC research note on Tuesday.

The senior tranches have not rallied as much as other CLO classes further down the capital stack.

“Despite a strong CLO market rally, significant tightening in competing assets – and loans – leave CLO AAA’s looking too wide,” the Wells Fargo analysts said.

“Current CLO AAA and AA spread levels will limit CLO issuance,” the analysts said. “Specifically, a new issue CLO’s excess spread is too low.”

Existing warehouses have asset spreads in the 350 bps range, but a new issue CLO has an all-in debt cost of roughly 220 bps, according to the report.

More than $25 billion of CLOs have priced year to date, market sources said.

Meanwhile, high-grade secondary supply stayed strong at the start of the week with $471.57 million of investment-grade CBO/CDO/CLO paper traded on Monday, according to Trace data.

Also, $182.44 million of non-high-grade CBO/CDO/CLO issues were traded during the session.

Prices held steady for senior tranches and improved further down the capital structure, Trace data shows.

High-grade paper averaged 96.80 on Monday, flat from the same period a week ago.

Average prices for lower-rated paper improved to 81.70 on Monday, up from 75.70 in the same session a week ago.

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