3i Debt Management, other issuers on tap for European CLOs; U.S. CLO deal pipeline thin

By Cristal Cody

Tupelo, Miss., July 18 - Fund manager 3i Debt Management, part of London-based 3i Group plc, is expected to be in the market later in July or August with its previously reported €300 million European CLO since the company released quarterly results on Thursday, sources said.

The company has been expected to price a European CLO deal since the European market reopened in the spring, sources report.

Resource America Inc. will arrange the offering.

3i Group reported in a statement on Thursday that the group's balance sheet was £47 million in the period from April 1 to June 30.

"This primarily relates to investments made in the U.S. and Europe in preparation for the launch of further CLO funds within our debt management business," the company said.

Additional European deals are expected following Ares Management LLC's €310 million Ares European CLO VI Ltd. deal that priced on Wednesday in London, sources said.

Issuance in the U.S. CLO market for the week continued to be quiet in typical summer fashion, a market source said.

Refinancing activity high

The CLO market has seen a high amount of refinancing activity over the past six months, according to informed sources.

Refinancings typically lead to increased amortization in CLOs past the reinvestment period, Dave Preston, senior analyst at Wells Fargo Securities, LLC, said in a note.

"Given the high volume of repayments in the loan market over the past six months, we believe that senior notes will continue to amortize at elevated rates," Preston said.

"Faster senior note pay-downs can depress equity returns, which can be especially problematic for secondary equity buyers who purchased at premium prices," he said. "Alternatively, faster amortization can lead to increased CLO calls, which provide return upside for those who purchase mezzanine notes at healthy discounts. Although much of the upside has been squeezed from this trade, we believe that amortization will continue to be biased toward the high side."

Data shows that 40% of CLOs that exited reinvestment in the first quarter had a senior note decrease of more than 20 percentage points, on what is typically the first amortization payment.

"This indicates that deals are now quickly amortizing once reinvestment ends," Preston said.

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