Fortress refinances fixed-rate CLO notes; strong post-holiday primary action eyed

By Cristal Cody

Tupelo, Miss., Aug. 28 – Fortress Investment Group LLC affiliate FCOD CLO Management LLC refinanced $43.9 million of fixed-rate notes in two tranches from a vintage 2018 middle-market CLO transaction.

CLO managers have refinanced about $26 billion of vintage CLOs year to date, market sources said.

“Refinancing activity has resumed primarily in August after a hiatus since mid-March, but activity is different now compared to then,” Fitch Ratings said in a report on Friday. “Managers are mostly electing to refinance their few fixed-rate tranches as they look expensive compared with all-in costs of variable-rate notes amid the sharp drop in Libor rates.”

Fitch notes there have been at least 13 broadly syndicated loan CLOs that have been refinanced in August.

Meanwhile, new issuance has slowed in August.

“August primary volume has dropped significantly compared to prior months,” Wells Fargo Securities, LLC analysts said in a research note on Friday.

August’s volume to date of $3.9 billion is a 60% drop month over month “and is equal to April issuance – the second lowest issuance month of the year,” the analysts said. “We expect a heavy issuance calendar after Labor Day, as U.S. CLO managers appear keen to issue before the U.S. election in November.”

In April, the CLO primary market resumed activity following the Covid-19 market disruption in March, though second quarter volume was light, Moody’s Investors Service said in a CLO report on Friday.

“Issuance restarted with 10 deals in April, increasing to 15 CLOs in May and 21 in June,” Moody’s said. “However, overall new issuance volume was low in Q2 at $18 billion compared to $26 billion in Q1 and $32 billion in Q4 2019.”

Secondary supply strong

Meanwhile, the secondary market has benefited from the lack of primary supply, according to Wells Fargo.

“In secondary volume, August is shaping up to be the third or fourth most active month of the year,” the analysts said. “We track roughly $3.4 billion in Trace volume through the first four days of the week, bringing the monthly total to almost $16 billion – an increase of 25% over July’s full month total.”

CLO AAA secondary spreads firmed over the week, while the rest of the capital stack was mostly unchanged, the analysts said.

Primary AAAs are printing at a Libor plus 150 basis points average, while trading at Libor plus 132 bps in the secondary market.

In mid-August, AAAs were quoted 5 bps wider in the primary market and nearly 10 bps softer in secondary trading.

“The tightening leaves AAA secondary spreads nearly 20 bps tighter in August alone – compared to 20 bps of tightening in the two months from mid-May to mid-July,” the Wells Fargo analysts said.

Euro-denominated AAA tranches are trending at a Euribor plus 145 bps average across both the primary and secondary markets.

Fortress refinances

Fortress sold $43.9 million of notes due April 15, 2031 in the refinancing, according to market sources.

Fortress Credit Opportunities XI CLO Ltd./Fortress Credit Opportunities XI CLO LLC priced $30 million of 2.45% class A-1F-R senior secured fixed-rate notes (expected ratings Aaa/AAA) and $13.9 million of 3.32% class B-F-R senior secured fixed-rate notes (AA).

The original $30 million of 4.03% class A-1F notes and $13.9 million of 4.45% class B-F notes were issued April 16, 2018.

Natixis Securities America LLC was the refinancing placement agent.

The CLO is backed primarily by middle-market senior secured corporate loans.

Fortress Investment Group is based in New York.

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