CLO primary action forecast to resume in weeks ahead; secondary trading light; BBs soften

By Cristal Cody

Tupelo, Miss., Sept. 5 – CLO primary action is expected in the weeks ahead with more issuers entering the pipeline later in the month, according to markets sources on Friday.

U.S. CLO issuance year to date stands at more than $87 billion, according to data compiled by Prospect News. More than €10 billion of euro-denominated CLOs have priced through August, data shows.

The U.S. tally is the third highest yearly total on record, according to Wells Fargo Securities, LLC analysts on Friday.

“Despite comments that August issuance seemed slow, we note that August’s monthly total was greater than any monthly total in 2013,” Wells Fargo senior analyst Dave Preston and associate analyst Jason McNeilis said in a note.

About $10 billion of CLOs priced over the month, according to Prospect News data.

Near-term offerings are expected in the U.S. and European primary markets, including a €414 million CLO deal from Alcentra Ltd. via Morgan Stanley & Co. International plc, sources said.

Market analysts forecast up to $120 billion of total CLO issuance for the year.

“We anticipate strong issuance through year-end, as most parties involved have incentives to issue deals,” the Wells Fargo analysts said. “Managers most likely want to continue to grow AUM, especially with the specter of risk retention on the horizon. It is likely that investors, especially at the AAA level, will be happy to absorb the supply, if that supply limits spread tightening.”

Secondary action quiet

CLO secondary trading picked up over the week but continues to be light, sources said.

Secondary activity also is “manager-specific,” one source said.

AAA spreads remain range-bound and were quoted at Libor plus 148 basis points on Friday.

CLO BB-rated spreads have eased 15 bps from a month ago to Libor plus 665 bps, according to the Wells Fargo note.

“Primary issuance continues to be the focus for many accounts,” the analysts said. “AAA spreads have generally remained resilient, while mezzanine spreads continue to be soft.”

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