CLO issuance expected to climb on 'ton of demand' headed into May; CLO spreads tighten

By Cristal Cody

Tupelo, Miss., April 23 - Issuance of collateralized loan obligations is expected to slow compared to the first quarter, but it is not cooling anytime soon, according to market sources on Tuesday.

"Definitely a tremendous pipeline coming for CLOs," a source said.

Moody's Investors Service is expected to rate about $8 billion of CLOs between the April-May timeframe, one source said.

Moody's did not return calls by press-time for confirmation.

One or two new CLOs may price during the April 22 week but the primary market likely will be fairly quiet for the remainder of the week, according to market sources.

"We're seeing a ton of demand," according to a source. "The only problems are on the supply side right now. There's not a lot of organic loan growth from leveraged companies. There's a lot of refinancings, but not new companies trying to find new loans. The big things that will spur that will be mergers and acquisitions activity and leveraged buyout growth."

Most tranches in CLOs are floating-rate notes, which are attracting investor interest.

"It's an opportune time to buy floating-rate assets," a source said. "Yields got so low in high-yield bonds that leveraged loans started to look really attractive."

The market has seen more than $26 billion of CLOs priced just in the first quarter, Fitch Ratings said in a report on Monday.

"The only quarter with more issuance than that was the second quarter of 2007, so there's been really a tremendous demand for this product," said a source familiar with the market.

"People recognize these are not the other type of CDO vehicles. They are not backed by synthetic assets or other credit products, which tended to be more volatile during the [financial] crisis. They're backed by senior secured loans, which have the highest recovery rate in a corporate capital structure."

The post-financial crisis market begin to see signs of life in 2011 and "things really got going in 2012, especially the second half of the year," one source said. "We saw a huge rally both in secondary and primary markets for CLOs."

Triple-A rated CLOs traded at Libor plus 140 basis points to 150 bps at the end of 2012 and had tightened to Libor plus 100 bps by March, according to a market source.

Secondary spreads saw some weakness immediately before the April 1 start of the Federal Deposit Insurance Corp.'s new rules that require CLOs to be treated as higher-risk assets for calculating deposit insurance assessments for large institutions.

"A week or two before it went into effect, the market was much softer, but now I think people have gotten past it and the market seems to be moving as it was before that," a source said.

CLO spreads hit Libor plus 115 bps but have been seen tightening this week to Libor plus 112 bps, according to a market source.

"Spreads are tighter across the board for basically everything out there," the source said. "Last week it was very active, the most active week we've seen in a month's time."

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