The primary CLO market stayed busy last week, with LCD tracking seven new CLOs pricing in the U.S., for a total of roughly $3.56 billion, a touch inside last week's $3.57 billion, which was the largest weekly new-issue tally of the year. Things were quieter in Europe, with Alcentra expected to be the next manager to print a European CLO several weeks down the line (see below). Global issuance for the week stood at $3.56 billion, according to LCD.
Part of this past week’s supply likely results from arrangers and managers wanting to clear the near-term decks ahead of the pending Easter break, as well as the IMN’s Third Annual Investors’ Conference on CLOs and Leveraged Loans, taking place in New York on April 22-23. As a result, new CLO pricing activity could take a breather over the next couple of weeks.
Still, with this past week’s impressive tally, YTD issuance through April 11 has now overtaken last year’s supply over the same period, at $29.77 billion versus $26.92 billion, according to LCD. It’s the first time in 2014 that issuance has run ahead of last year, following a quieter-than-usual January.
Again supply came from a mix of established platforms, as well as another brand new manager – Bradford & Marzec. Of note, Prudential’s jumbo $811.75 million CLO – the second largest cash-flow CLO transaction of the year behind CIFC's $829 million CIFC Funding 2014-II – priced its AAAs inside 150 bps, at 148 bps (DM).
Halcyon Loan Advisors Funding 2014-2 is expected to price today via Citi, after all tranches except the BBs were subject by Friday. The same arranger is also looking to price a refinancing of Octagon Investment Partners XII for Octagon Credit Investors this week.
Meanwhile, Deutsche Bank is working on a $512.58 million CLO for Benefit Street Partners, while Steele Creek (via BNP), Aegon USA Investment Management (Jefferies), and Saratoga Investment Corp. (via Cohen & Co) are among those in the pipeline.
Europe’s next transaction may not appear until after the Easter break, with Alcentra likely to be the next out of the door in the next couple of weeks. Oaktree is rumoured to be three-to-four weeks away with its debut European CLO 2.0 (via Barclays), and behind that are Pramerica (via Barclays), 3i (via CS), Carlyle (via Citi), and Avoca (via Morgan Stanley).
YTD European CLO issuance stands at €3.02 billion, versus €600.5 million in the year-ago period, according to LCD.
Alcentra is working with J.P. Morgan on its second CLO 2.0 of the year, having priced an upsized €413.5 million CLO – Jubilee CLO 2014-XI – in January.
Both CLOs are structured via Rule 3a-7, which allows the Bank of New York-owned manager to retain bonds in the collateral pool while still exempting the vehicle from the final draft of the Volcker Rule.
Volcker moved back into focus this week after the Fed’s decision to grant banking entities two one-year extensions to the conformance period under the Volcker Rule, to July 21, 2017. The move minimizes the impact of the rule for 1.0 CLOs, as the vast majority of the current $135 billion CLO 1.0 universe is expected to have amortized or been repaid by then. However banks holding CLO 2.0 deals will still need to comply with the rule, which doesn’t permit them to own positions in CLOs that hold bonds.
In response, the LSTA said the two-year extension “does not solve the problem”. Market participants had been hoping for a more permanent fix, akin to that proposed by the legislation drafted by Rep. Barr, which would grandfather all CLO debt issued before Jan. 31, 2014. There’s speculation among some market participants that regulators won’t take any other actions regarding the Volcker Rule. As for the legislative route, sources say it would be difficult to get bipartisan support for the Barr Bill beyond the committee level, as Democrats have little or no desire to circumvent the regulators.
If the vast majority of the current $135 billion CLO 1.0 universe is expected to have amortized or been repaid by July 2017, the bulk of CLO 2.0s issued after 2009 (roughly $140 billion, according to Wells Fargo’s David Preston) could still be outstanding after July 2017.
Included among the possible solutions for this batch of CLOs with regards to Volcker compliance/exemption are refinancing, amendments to exclude bonds, bond removal from portfolios, inclusion of existing manager removal clauses (“for cause” removals and “key manager” clauses) as events of default, and as a last fix, waiving manager removal rights.
For European managers structuring deals as loan-only is a non-starter for most given the reliance of European CLOs on the bond market to boost collateral pools, so any that do need to structure Volcker-compliant deals will have to utilise 3a-7, or eliminate the ‘removal for cause’ clause for the controlling class, which would exempt the CLOs from Volcker.
But Europe generally has been more relaxed about structuring Volcker compliant/exempt deals, as aside from JPM CIO, U.S. banks do not tend to invest in European CLOs, and European investors appear less focused on liquidity, sources say. – Sarah Husband
