Step-up coupons for new AAA slices on the rise; European CLO manager numbers decline

By Cristal Cody

Tupelo, Miss., Oct. 9 - New CLO deals likely will price before the week is out with the pipeline expected to stay steady through the fall, according to market sources.

"After a slow restart following Labor Day, we are finally beginning to see action in the primary CLO market," Kenneth Kroszner, an analyst at RBS Securities Inc., said in commentary released on Wednesday.

More than $60 billion of new CLOs have priced this year with about $70 billion to $80 billion total projected for the year, sources said.

The market has surpassed total CLO volume of $55.2 billion in 2012.

"With lower long-term risk-free rates and a flattening yield curve, CLO debt based off 3-month Libor should now look relatively more attractive, especially AAAs considering they've experienced virtually no spread tightening," Kroszner said.

Seven out of the last 32 deals have incorporated a step-up coupon in the AAA tranche as investors seek shorter duration paper in a spread compression basis or benefit from higher income in a spread widening basis, Kroszner said.

Ableco Capital LLC priced $589.3 million of class A loans due 2019 in a CLO securitization that closed on Sept. 24 and included a step up coupon for the AAA-rated slice. Ableco Capital sold $26 million of class A-R revolving loans (Aaa/AAA/) at Libor plus 220 basis points, which step up to Libor plus 290 bps after the first two years.

CIFC Asset Management LLC raised $418 million in the CIFC Funding 2013-III, Ltd./CIFC Funding 2013-III LLC CLO that closed in September and included $125 million of class A-1B senior secured floating-rate notes (/AAA/) priced at Libor plus 110 bps, which step up to Libor plus 160 bps in April 2015 and Libor plus 185 bps in April 2016.

"We continue to see innovative structures, especially surrounding the AAA tranche due to its thin buyer base," Kroszner said.

"In addition, a handful of deals have included senior and mezzanine AAA tranches," he said. "Seniors offer higher subordination and less probability of ratings migration, while mezz tranches offer AAA ratings with a spread pick-up to first pay notes."

Managers thin out

In the European CLO market, manager consolidation continues "just as new issuance has begun to percolate," Moody's Investors Service said in a report. "Many smaller pre-crisis CLO managers have yet to return to the market."

New transactions coming up in the European deal pipeline include Intermediate Capital Group plc's €500 million St Paul's CLO III Ltd., NIBC Bank NV's €300 million North Westerly CLO IV and Avoca Capital Holdings' €300 million CLO, according to market sources.

The number of European CLO managers declined 23% to 46 as of June from a pre-consolidation peak of 60, Moody's said.

Large managers in Europe controlled 31%, just under a third of assets under management as of June, in 49 of the 181 transactions.

In the U.S. CLO market, the number of managers rose to 131 by mid-2013, with the addition of 18 new managers since early 2012, the report said.

Although consolidations in the U.S. market "have ceased," large managers with 10 or more CLOs control 50.5%, or just over half of all assets under management, in 335 of the 665 U.S. CLOs, Moody's said.

The number of large managers in the U.S. market rose to 20 over the summer from 17 in 2011, according to the report.

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