European CLOs unlikely to incur losses; Palmer Square tests deal waters; JMP notes CLO plans

By Cristal Cody

Tupelo, Miss. May 6 - Few European CLO tranches are likely to incur losses, Moody's Investors Service said in a report on Monday.

"The likelihood of senior tranches incurring principal losses is remote in European arbitrage cash flow CDOs," Moody's said.

"European CLOs emerged from the 2009 downturn intact, thanks to the effectiveness of structural protections, such as over-collateralization diversion mechanisms. Although no events of default or principal losses have occurred in rated European CLOs since 1999, when we first rated one of these transactions, a small number of junior tranches can suffer losses if credit quality of underlying collateral deteriorates."

The risk of an interest shortfall on the non-deferrable senior tranches is remote because European CLOs generate substantial excess spread, Moody's said.

The subordination in two new Moody's-rated European transactions priced this year - Cairn CLO III BV's €300.5 million CLO that closed in February and ALME Loan Funding 2003-1 Ltd.'s €325 million offering that priced in April - is higher than in pre-crisis transactions, the agency said.

"These transactions also include tighter reinvestment constraints and additional clarity in deal documents to minimize the risk misinterpretation compared to CLO 1.0," Moody's said.

None of the 197 European CLOs that Moody's rates has incurred any principal losses, but there is a high likelihood of losses for 13 tranches in eight CLOs with ratings of Ca and C, Moody's said.

Palmer Square issues

Palmer Square Capital Management LLC began looking at the CLO market in 2011 with numerous investments in the space.

"Since then, our effort has broadened pretty dramatically now to include a variety of mandates that we pursue on behalf of institutional clients, as well as high-end net worth family clients," Christopher Long, president of Palmer Square Capital Management, said in an interview on Monday.

The firm sold its first CLO, a $362 million offering, via private placement in April.

The 2013-1 CLO is expected to close soon, and the firm plans additional U.S. CLO issuance in the future.

JMP plans CLO deals

JMP Group Inc. chairman and chief executive officer Joe Jolson said in an earnings conference call on Monday that the company's recent $343.8 million CLO offering priced with a weighted average coupon of three-month Libor plus 186 basis points.

JMP Credit Advisors LLC closed on the Rule 144A/Regulation S offering the previous week and retained $17.3 million, or 73%, of the subordinated notes.

On the call, Jolson said JMP Credit Advisors managed one CLO with just over $470 million of assets under management at the end of the quarter.

"The excess profits from this investment will start to decline more rapidly in the second half of 2013 as we have now reached the end of the CLO's reinvestment period," he said.

"We hope to regularly access the CLO issuance market over the next five years with a goal of garnering more than $2 billion of [assets under management] by December 2017, and that compares to roughly $800 million today," Jolson said.

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