CLO mezzanine spreads widened in August; AAA spreads were ‘more resilient’; market quiet

By Rebecca Melvin

New York, Aug. 29 – Spreads widened in the junior part of the capital structure of CLO deals in August, and didn’t retighten by the end of the month, contrary to what occurred in other high-yield asset classes, a New York-based market source said.

Mezzanine spreads moved wider along with the rest of the high-yield asset classes, but the other asset classes were able to recover more than 50% of the move.

It was likely due to the higher liquidity premiums of the CLO tranches that they didn’t retighten, the market source said. “Those parts of CLO deals are more illiquid.”

Spreads at the higher end of the capital structure of CLO issuance, or the AAA tranches, held in pretty well with a slight widening along with the broader markets in August. But “the senior parts were more resilient and didn’t sell off that much, and they didn’t tighten either,” the market source said.

Spreads on CLO AAA tranches were pretty much range bound for much of August and stood at Libor plus 147 basis points to 152 bps by month end, the market source said.

The spread on more junior BB tranches was seen at Libor plus 660 bps at month end, and the spread on B tranches was seen about 775 bps.

Actual spreads are dependent on individual deal managers, however. More seasoned managers that have a solid reputation may be able to bring deals with tighter spreads, the market source said.

Meanwhile, the CLO secondary market was quiet with no new pricings in the primary market on Friday, as the August books closed ahead of a three-day weekend for Labor Day and traders considered what to expect from post-summer business that starts next Tuesday.

New CLO issuance for August totaled $8.58 billion in 17 deals, which was down from nearly $16 billion in 30 deals for July but higher compared to August 2013 when $7.33 billion in 15 deals priced, according to Prospect News data.

In equities, the Standard & Poor’s 500 stock index closed at another record high – albeit on thin volume – to mark the end of August, after slumping to near a three-month low on Aug. 7.

The S&P gained 6.63 points, or 0.3%, to 2,003.37, the Dow Jones industrial average rose 18.88 points, or 0.1% percent, to 17,098.45 and the Nasdaq Composite added 22.58 points, or 0.5%, to 4,580.27.

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