Europe CLO AAA slices price wider than U.S. tranches; Ares Enhanced Loan to close new CLO

By Cristal Cody

Tupelo, Miss., July 22 -European CLO AAA-rated tranches are pricing wider on average than their U.S. counterparts, while the weakness is reversed lower in the capital structure, according to market sources on Monday.

AAA-rated tranches in U.S. CLOs have priced on average at Libor plus 125 basis points, while the AAA-slice of European CLOs have come wider at the Euribor plus 135 bps area, market sources said.

Lower in the capital structure, BBB-rated U.S. CLO notes have priced in the Libor plus 450 bps area, compared to recent European CLO deals where the BBB-rated tranche priced at Euribor plus 425 bps area.

The performance of European CLOs has largely tracked that of the underlying loan market, according to Morgan Stanley & Co. LLC analysts.

"In new issue deals, particularly, the European AAA tranches tend to be wider because of risk retention related constraints," Morgan Stanley analysts Vishwanath Tirupattur and Mia Qian said in a note.

"In European CLOs, we prefer the more senior tranches - AAA, AA and A tranches mainly given the challenges to economic growth in Europe and the upcoming wall of highly leveraged, LBO-heavy maturities," the analysts said. "The prospects for default rates to persist at relatively high levels in Europe makes us cautious lower down the capital structures in legacy transactions, not withstanding the fact that they trade at a discount to their U.S. counterparts."

In the past week, Ares Management LLC sold its €310 million Ares European CLO VI Ltd. and Intermediate Capital Group plc brought the €400 million St. Paul's CLO II Ltd. CLO.

Other issuers on the calendar with new European CLOs include 3i Debt Management, Pramerica Investment Management Ltd. and Blackstone/GSO Debt Funds Management Europe Ltd.

The European CLO market reopened earlier in 2013 after a four-year absence with €3.1 billion in nine deals priced year to date.

More than $43 billion of new U.S. issuance has priced through July with estimates for the market to reach about $70 billion total for the year.

In contrast, about €4 billion to €5 billion of European CLO issuance is expected as the market faces hurdles that include additional regulations and challenges with collateral sourcing, sources report.

Ares deal set to close

In new U.S. CLO issuance, Ares Enhanced Loan Investment Strategy IR, Ltd./ Ares Enhanced Loan Investment Strategy IR, Corp. priced a $541.75 million offering of notes due July 15, 2025 set to close on Tuesday, according to informed sources.

The $236 million tranche of class A-1A senior floating-rate notes (Aaa/AAA/) priced at Libor plus 125 bps. The $87 million tranche of class A-1B senior floating-rate notes (Aaa/AAA/) priced at Libor plus 100 bps, which will reset before the Jan. 23, 2015 payment date.

In the remaining slices of the capital structure, Ares sold $40 million of class A-2A senior floating-rate notes (/AA//) at Libor plus 190 bps; $20 million of 4.31% class A-2B senior fixed-rate notes (/AA/); $34 million of class B mezzanine deferrable floating-rate notes (/A/) at Libor plus 305 bps; $26 million of class C mezzanine deferrable floating-rate notes (/BBB/) at Libor plus 375 bps; $20 million of class D mezzanine deferrable floating-rate notes (/BB/) at Libor plus 500 bps and $78.75 million of subordinated notes.

Citigroup Global Markets Inc. was the placement agent.

Ares Enhanced Loan Management IR, LP will manage the CLO.

The notes will be issued on the closing date in connection with the refinancing of the CLO manager's secured notes due Oct. 16, 2020 that priced in 2008.

Ares Enhanced Loan Management IR, an affiliate of asset investment management firm Ares Capital Management LLC, plans to use the proceeds to redeem in full the classes of secured notes that are being refinanced.

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