CLO Managers Favor November's Costly Knowns Over 2019's Unknowns

(Bloomberg) -- It’s been an expensive month to price new collateralized loan obligations in Europe. But the fear of what lies ahead is spurring some managers to take the plunge now rather than wait for next year’s issuance window.

A hefty pipeline of deals is lining up to price next year so competition for investor attention could be fierce. And while current market conditions aren’t overly friendly, they might be even worse in January given Brexit-related uncertainty. Added to this, managers with fuller warehouses say it’s better to issue now than to risk waiting especially as prices on loans in the portfolio soften.

In view of this, Barings (UK) Ltd, Brigade Capital Europe Management and Partners Group (UK) Management Ltd decided to stomach higher funding costs on their new deals by issuing during the volatility. Last week’s risk-off market saw spreads balloon at the bottom of the liability stack even as spreads on triple-A notes held relatively steady.

At the lowest-rated single-B level, CLO spreads moved from the mid-800s basis points on transactions pricing in mid-November to 900 basis points on the most recent new issues. During volatile periods, low-rated CLO notes can come under pressure as hedge-fund investors play off relative value against high-yield bonds, and falling secondary bond prices can also weigh on double- and triple-B CLO spreads.

CLO Managers Favor November's Costly Knowns Over 2019's Unknowns

Bearing Witness

Barings’ syndicated triple-A tranche came tight versus the week’s other deals as arranger Credit Suisse Securities (Europe) Ltd tapped into strong demand for this established issuer, resulting in an over-subscription, according to a person familiar with the matter.

Yet the impact of wider spreads further down the liability stack can still be seen in the vehicle’s funding costs.

  • Barings’ overall funding cost was 191 basis points (based on fixed and floating rate coupons), with its syndicated triple-A notes pricing at 98 basis points
  • In October Five Arrows Managers LLP also printed syndicated triple-A notes at 98 basis points but had a lower funding cost of 179 basis points
    • Funding costs are based on the weighted average adjusted fixed and floating rate spread, according to Bloomberg data
  • Selling pressure has seen CLO secondary market spreads widen over past two weeks by 5 basis points for AA tranches, 20 basis points for A, 40 basis points for BBB, 50 basis points for BB and 60 basis points for B, Deutsche Bank ABS analysts wrote in a Nov. 18 research note
  • Triple-A anchored tranches have priced at 96 basis points throughout the month, with syndicated triple-As pricing between 100-102 basis points, Bloomberg data show

Funding Costs

TransactionManagerPricing DateWeighted Avg.
Adj. Spread
(Fxd, Flt; bps)
BCCE 2018-2XBain03/10/2018185
OHECP 2018-7XOak Hill12/10/2018178
HARVT 20XInvestcorp19/10/2018183
RFTE 2018-1XKing Street25/10/2018181
JUBIL 2018-21XAlcentra26/10/2018187
CONTE 6XRothschild22/10/2018179
CORDA 12XCVC02/11/2018180
BECLO 7XBlackRock02/11/2018180
OZLME 5XOch Ziff05/11/2018183
DRYD 2018-66XPGIM08/11/2018185
PRVD 2XPermira09/11/2018183
INVSC 1XInvesco14/11/2018188
GLME 2XGoldenTree16/11/2018180
ARMDA 3XBrigade Capital19/11/2018185
BABSE 2018-3XBarings23/11/2018191
PENTA 2018-5XPartners Group23/11/2018195

(Sarah Husband is a leveraged finance strategist who writes for Bloomberg. The observations she makes are her own and are not intended as investment advice.)

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