CLO secondary spreads tightest since 2011; double Bs firm; demand good across structure

By Cristal Cody

Tupelo, Miss., May 24 - Collateralized loan obligation secondary spreads are on average at the tightest level since 2011, according to market sources.

CLO tranches remain in high demand, and spreads continue to tighten, Dave Preston, senior analyst at Wells Fargo Securities, LLC, said in a note.

"The secondary market has regained the widening of late March and April, as investors bought across the capital structure," Preston said.

U.S. 2.0 CLO AAA-rated tranches are trading at Libor plus 112 basis points, about 3 bps tighter than the previous month, Preston said.

AA-rated tranches have come in about 15 bps since April to the 165 bps plus Libor range.

A-rated CLO notes are in 25 bps from the previous month to the 275 bps plus Libor area.

BBB-rated notes are trading in the range of Libor plus 385 bps, about 25 bps tighter from a month ago.

At the other end of the structure, BB-rated tranches have firmed 75 bps from April to the Libor plus 550 bps area.

New issue spreads tighten

New CLO tranches also are holding tighter in a spread range in pricing, although triple A-rated tranches typically take more work to price, according to an informed source.

"The top of the capital structure and the bottom of the capital structure tend to be the two tranches that can be the most challenging or time-consuming to place," the source said. "Beyond that, there seems to be really good demand up and down the nest."

In a recent CLO offering, a market source said Octagon Credit Investors, LLC's Octagon Investment Partners XVI, Ltd./Octagon Investment Partners XVI, LLC's $298.5 million tranche of class A senior secured floating-rate notes (Aaa) priced at Libor plus 112 bps, a range seen across several deals in May.

Mezzanine tranches, such as the double B tranche, have come in from levels of Libor plus 650 bps to 750 bps in January.

"Now, we're seeing these closer to 600 [bps plus Libor] if not inside of 600 [bps]," a source said.

A BB-rated tranche of a CLO offering priced on May 3 came at 575 bps plus Libor, while a double B tranche in another CLO sold on May 15 priced tighter at 537.5 bps plus Libor, the source said.

"Double Bs certainly have come in relative to where they were a couple of months ago," the source said. "A similar trend was seen in the triple Bs earlier this year."

BBB-rated CLO tranches were printing from Libor plus 425 bps to 450 bps area at the start of the year.

"The type of market we're seeing now is really the low 400s," a source said.

Single A CLO bonds have followed similar trends, pricing lately in the Libor plus high 200 bps area from the low 300s bps area earlier in the year.

Pipeline slows

U.S. CLO issuance has reached $34.5 billion headed into the end of May, according to market sources. More than $26 billion of the total issuance priced in the first quarter.

New deals have "slowed somewhat in May compared to the levels of Q1, but issuance has continued after the April 1 FDIC deadline," Wells Fargo's Preston said.

The first quarter saw a rush of CLOs ahead of the Federal Deposit Insurance Corp.'s deadline for new rules for banks that require CLOs to be treated as higher-risk assets.

A few CLO deals are expected in the coming weeks, and the market is "doing generally well," a source said.

The late May to June CLO pipeline includes a $413.8 million CLO from Trimaran Advisors LLC, a €300 million European deal from Ares Management LLC and a €300 million CLO offering from Carlyle Group.

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