Highland Capital Management plans additional 2013 CLO issuance, active buyer of CLO tranches

By Cristal Cody

Tupelo, Miss., May 22 - Highland Capital Management, LP plans additional U.S. issuance over the year after pricing its first collateralized loan obligation since 2008 earlier in the year, Josh Terry, managing director and head of structured products at Highland, said in an interview on Wednesday.

Highland sold a $525.5 million CLO, Acis CLO 2013-1 Ltd., which is managed by affiliate Acis Capital Management, LP, in February.

The Dallas-based firm, the largest U.S. CLO manager with about $13.5 billion of assets under management, also manages 23 CLOs.

"We have issuance plans as we go forward this year, strictly focused on the U.S.," Terry said.

Highland sold its European CLO management contracts to Carlyle Group LP in 2012.

The Europe market reopened this year with new CLOs priced for the first time since the financial crisis from Cairn Capital Ltd., Prameria Investment Management Ltd. and Apollo Global Management, LLC. Several new CLOs deals are expected over the month, including from Carlyle Group LP and GoldenTree Asset Management LP, according to market sources.

"The European market has started to rebound, but it's really constrained by new regulations that require managers to retain a significant portion of the vehicle," Terry said. "Bank rate spreads have been tight, CLO liability spreads have been wide, and it hadn't really worked for the equity holder of the CLO to issue CLOs until this year. The arbitrage got in line and some managers found a way to make it work, but that market will be restrained by regulations."

The majority of transactions are expected to be in the United States with about $70 billion to $75 billion of offerings projected for 2013 and nearly $35 billion of new CLOs already priced this year.

New CLO issuance in Europe in 2013 is projected at about €5 billion.

CLO interest is coming from investors, regional banks and other players coming into the market over the last six months, Terry said.

"It's a positive development for the CLO market," he said. "They're taking a look at the rest of the capital structure. Banks are starting to move further down into CLO tranches."

Highland also manages $1.7 billion of CLO bonds and equity, with the majority invested in other CLO managers' deals, according to Terry.

"We're a very active participant in the market, predominantly buying triple B, double B and equity of other CLO managers," he said. "Sometimes, double B tranches are 90 cents on the dollar, where triple B tranches are 95 cents on the dollar."

Predominant buyers of the double B and triple B tranches this year have been hedge funds, while in the pre-financial crisis, the majority buyers of those tranches were usually other CLOs. Due to regulations that require banks to hold capital, new CLOs cannot buy tranches of other CLOs.

"There's a significant spread pickup in double B tranches," Terry said. "The underlying bank loans of new issue CLOs are trading above par and rated B/B2 on average, but we are buying BB CLO tranches in the low 90s, which gives us much higher return potential for a better rated asset. There's still significant dislocation in the market."

Underlying bank loans of CLOs are holding at the Libor plus 360 bps to 370 bps range.

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