Sound Point prices floating-rate CLO tranches; post-holiday market begins quietly

By Rebecca Melvin

New York, Dec. 2 - Sound Point Capital Management LP priced its Sound Point CLO IV, Ltd. offering of floating-rate notes in seven tranches, but terms were expected to remain unavailable until Tuesday, according to an informed source.

The deal follows on the heels of Sound Point's CLO III $420.75 million of notes priced in nine tranches at the beginning of August. At that time, the $248 million tranche of class A senior floating-rate notes (Aaa//AAA) priced at Libor plus 135 basis points. In general, spreads have widened since that time, however.

The new deal is being underwritten by Morgan Stanley & Co. LLC with Sound Point Capital Management acting as manager.

The New York-based asset manager plans to use the proceeds to purchase a $600 million portfolio of primarily leveraged loans.

There is about $13 billion of CLO transactions in the pipeline for December, but it is impossible to predict how many deals will price this week, the market source said.

Last week ING Alternative Asset Management LLC priced $518.2 million of notes in a CLO.

ING sold the AAA tranche at Libor plus 145 bps, wider than where the firm priced two CLOs earlier in the year.

The outlook for U.S. CLOs is stable, according to Moody's Investors Service in a pre-sale report on Sound Point CLO. Stable corporate loan performance is a key driver for the outlook.

"We base our forecast of corporate loan performance on the expectation that the credit quality of speculative-grade issuers will be stable, speculative-grade default rates will be low, and market liquidity will be sufficient to meet the refinancing needs of leveraged loan issuers," the Moody's pre-sale report said.

Barclays said in a recent report that robust issuance so far this year is due largely to low credit volatility and elevated rates volatility but that the longer-term prospects of the CLO market was mixed given such developments as risk retention rules.

The rules could curtail demand for new loans, depending on how the CLO industry reorganizes between now and 2016, Barclay's credit research team wrote in a report published Nov. 22.

Sound Point CLO IV

The Sound Point CLO IV is a typical cash flow CLO transaction backed by a $600 million broadly syndicated loan portfolio, the Moody's pre-sale report said.

Moody's modeled the transaction using assumptions including a weighted average spread of 390 bps over Libor, 2500 weighted average rating factor, corresponding to a 23.1% default probability, eight-year weighed average life, 48% weighted average recovery rate, and 48 Diversity Score.

These assumptions indicated that the tranches merited the following provisional ratings: X notes, Aaa; A notes, Aaa; B notes, Aa2; C notes, A2; D notes, Baa3; E notes, Ba3; and F notes, B2.

While the transaction was seen to have many strengths like corporate-only debt in the portfolio, a concern is that the weighted average spread test calculations includes Libor floors, which may not be a permanent feature of the loan market, thereby creating additional ratings volatility.

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