CLO activity quiet; Black Diamond, Highbridge prep deals; Wells Fargo lowers forecast

By Cristal Cody

Eureka Springs, Ark., March 2 – CLO primary and secondary market activity continued to remain mostly quiet on Wednesday as the ABS conference in Las Vegas came to a close.

“There’s no real activity at all,” one source said. “A lot of deals haven’t been getting done, but that’s mostly caused by the market volatility and risk retention concerns.”

Risk retention regulations that require CLO managers to retain 5% of the risk in their CLOs take effect in December.

U.S. CLO volume totals $3.4 billion year to date.

Wells Fargo Securities LLC analysts on Wednesday revised their U.S. CLO issuance forecast to $60 billion from $75 billion on low loan issuance and a decline in equity demand.

Over the past month, J.P. Morgan Securities LLC and BofA Merrill Lynch analysts dropped their annual CLO volume forecasts to the $45 billion area.

“On the primary market, we still see strong demand for AAA CLOs from benchmark issuers, especially as banks react to low rates,” Wells Fargo Securities analysts said in a note. “We also expect demand for dual risk retention issues. Down the stack, we see marginal equity and mezzanine buyers still hesitant to buy primary issue.”

Coming up, Black Diamond Capital Management, LLC is in the deal pipeline with a $350 million CLO offering.

Also, additional details emerged on Highbridge Principal Strategies LLC’s transaction in the works. The CLO manager plans to price a $406.75 million deal.

Secondary market action has been light over the week with investors and participants at the industry conference, making it difficult to gauge spreads, according to a market source.

Most conference participants are staying optimistic.

“People are more constructive than I expected them to be – a little bit more positive on CLOs,” a source said. “Because it’s so much wider, they see higher yields and now the opportunity looks greater.”

Wells Fargo Securities analysts also reported a “surprisingly positive tone” by participants at the conference.

“We sensed (seconded by several other investors) a slightly more bearish sentiment in investors who looked at multiple asset classes, while CLO-only investors were more positive,” the analysts said in the note.

“Ultimately, the question is whether the more constructive sentiment will be matched by actual buying (it has not, as yet),” the Wells Fargo analysts said. “Many investors reported raising money for mezzanine CLO investments, but these investors were generally still on the sidelines, wary of short-term technicals, and indicating a preference to wait for a more optimal entry point.”

Black Diamond offers CLO

Black Diamond Capital Management is marketing a $350 million broadly syndicated CLO offering, according to an informed source.

J.P. Morgan Securities LLC is the placement agent.

Black Diamond Capital Management priced a €397.4 million equivalent dual currency CLO on July 10.

Black Diamond was previously in the U.S. primary market in 2014 with the $411.75 million Black Diamond CLO 2014-1, Ltd./Black Diamond CLO 2014-1, LLC deal.

The alternative asset management firm is based in Greenwich, Conn., and has additional locations in Lake Forest, Ill., and London.

Highbridge to price

Highbridge Principal Strategies plans to price $406.75 million of notes due April 20, 2027 in the Highbridge Loan Management 8-2016 Ltd./Highbridge Loan Management 8-2016 LLC deal, according to a market source.

The transaction includes $3 million of class X senior secured floating-rate notes (Aaa/AAA), $248 million of class A senior secured floating-rate notes (Aaa/AAA), $36 million of class B-1 senior secured floating-rate notes (/AA) and $20 million of class B-2 senior secured fixed-rate notes (/AA).

The deal also includes $14 million of class C-1 mezzanine secured deferrable floating-rate notes (/A); $10 million of class C-2 mezzanine secured deferrable fixed-rate notes; $20 million of class D mezzanine secured deferrable floating-rate notes (/BBB-); $18 million of class E junior secured deferrable floating-rate notes (/BB-) and $37.75 million of subordinated notes.

Morgan Stanley & Co. LLC is the placement agent.

Highbridge closed on three CLO deals in 2015.

The subsidiary of Highbridge Capital Management, LLC is based in New York City.

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