GSO/Blackstone prices $564.3 million CLO; estimates for CLO primary market grow; spreads steady

By Rebecca Melvin

New York, Sept. 19 – GSO/Blackstone Debt Funds Management LLC brought its second CLO deal in as many months, pricing $564.3 million of notes in a cash flow CLO, according to an informed source.

The Thacher Park CLO Ltd./Thacher Park CLO LLC sold $357.5 million of class A floating-rate notes at Libor plus 147 basis points (Aaa//AAA); $58.33 million of class B floating-rate notes at Libor plus 220 bps (Aa2//); $26.95 million of class C floating-rate notes at Libor plus 305 bps (A2//); $23.1 million of class D-1 floating-rate notes at Libor plus 420 bps (Baa3//); $11 million of class D-2 floating-rate notes at Libor plus 430 bps (Baa3//); $28.45 million of class E-1 floating-rate notes at Libor plus 630 bps (Ba3//); $4 million of class E-2 floating-rate notes at Libor plus 630 bps (Ba3//); and $55 million of subordinated notes.

Goldman Sachs & Co. was the placement agent.

The CLO primary market continued to see elevated activity over the past week as September passed the midway mark, and current market conditions indicate that the trend is likely to remain intact for the next three months, market sources said.

Earlier this week, Morgan Stanley raised its forecast for CLO new issuance to $110 billion to $115 billion for 2014, up from the bank’s previous forecast of $90 billion to $100 billion.

Wells Fargo Securities raised its CLO issuance estimate for the year to $125 billion.

For the year to date, $93.28 billion in 179 deals have priced, according to Prospect News data. For September alone, $5.43 billion in 11 deals have priced so far.

“Issuance continues to be pretty robust as leveraged loan spreads have backed up. CLO spreads have backed up as well, but right now the arbitrage spread is pretty favorable, and as long as it remains favorable, the primary should remain robust,” a Morgan Stanley analyst told Prospect News on Friday.

Wells Fargo said in its Q4 2014 CLO Market Outlook published Sept. 17 that it believes CLO supply will be somewhat self-regulating but that spread tightening will be limited amid increased supply.

“For CLO investors, we think that true credit problems are not on the immediate horizon,” the Wells Fargo outlook note stated.

Loan defaults and downgrades may increase slightly over the next 12 months, but credit should be benign in the near term. The loan market may see increased credit stress beyond 2015 if the timing of credit deterioration and increased defaults coincides with tighter monetary policy and full implementation of new regulatory measures that may decrease credit supply, the Wells Fargo outlook said.

CLO spreads have remained stickier in September than for their securitized credit counterparts, so a recovery from the August lull for CLOs hasn’t materialized as it has in other markets, sources said.

In response to this dynamic, Wells Fargo recommends shorter duration 1.0 mezzanine tranches and higher-coupon 2.0 tranches going forward that may offer more protection against price volatility.

U.S. CLO spreads widened in August in tandem with commercial mortgage-backed securities and high yield, but CLO new issue spreads continue to remain near three-month wides unlike CMBS and HY, which have since retraced, Morgan Stanley CLO research analysts wrote in a recent note.

Currently the spread on new issue CLO AAA tranches is generically 151 basis points over Libor. That compares to a CMBS AAA generic new issue spread of 86 bps over Libor, according to Morgan Stanley research.

In the U.S. secondary market, the generic spread of AAA tranches is 105 bps over Libor, according to Morgan Stanley.

On a BB tranche in the secondary, the generic spread is 520 bps over Libor.

© 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.