CLO market hopeful for Volcker clarity; AAAs flat; American Capital invests in CLOs

By Cristal Cody

Tupelo, Miss., Feb. 11 - Although new issue activity in the collateralized loan obligation market has slowed for the start of 2014 due to the impending Volcker Rule, CLO market participants received a shot of hope on Tuesday, sources said.

New Federal Reserve chairman Janet Yellen said in comments before the House Financial Services Committee that regulators will review the rule's effect on the market. The regulation, announced on Dec. 10, prohibits banks from owning CLOs that hold bonds.

Primary activity slowed considerably in January following the rule's announcement on Dec. 10, market sources said.

More than $4 billion of CLOs have priced year to date, below the $9.5 billion issued in the same time period in 2013, according to market sources.

About $13.6 billion of broadly syndicated and middle market CLO deals remain in the pipeline, a source said.

Five U.S. dollar-denominated CLO deals that totaled $2.55 billion and one euro-denominated CLO that totaled €413 million priced in January, Morgan Stanley & Co. LLC analysts Vishwanath Tirupattur and Mia Qian said in a report.

"Global arbitrage CLO new issue volume amounted to $4.89 billion in 2014 YTD (including early February issuance)," the report said. "The current new issue AAA pricing spread is still hovering around L+150 bps, while mezzanine parts of the capital structure have tightened - nearly 40 bps tightening in new issue BB spreads. In our view, the ultimate impact on the long-lasting stickiness of CLO AAA spreads depends in large part on the outcome of the final Volcker Rule."

The Morgan Stanley analysts lowered their 2014 CLO issuance forecast a week ago by $10 billion to $55 billion to $65 billion.

In the secondary market, CLO volume in January was $2.95 billion for investment-grade CLO securities and $3.12 billion for below high-grade CLO securities, according to Morgan Stanley.

American Capital invests

In other market activity on Tuesday, American Capital Ltd. invested most of its 2013 structured products investments in CLOs, chairman and chief executive officer Malon Wilkus said during the company's fourth-quarter and fiscal 2013 earnings conference call.

"We invested $75 million in 2013, $27 million in the fourth quarter, in structured products, of which $70 million was invested in CLOs," he said. "Our structured products investments produced $72 million in interest in the year, $13 million in the fourth quarter. However, many of our CLO equity investments are maturing and we'll likely repay [them] entirely within the next several years. This may cause our structured products' revenue to decline, offset to the extent to which we make new investments in CLO equity."

American Capital priced two CLOs in 2013, including the $413.3 million ACAS CLO 2013-1, Ltd./ACAS CLO 2013-1, LLC deal in March and the $414.2 million ACAS CLO 2013-2, Ltd. transaction in August.

The private equity firm and asset manager is based in Bethesda, Md.

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