Collateralized loan obligations, which helped fuel the mid-2000s buyout boom but largely disappeared after the credit crisis, are showing signs of recovery.
Credit Suisse Asset Management floated a $410 million CLO in April, with its highest rated, AAA tranche pricing at Libor+125 basis points, according to Thomson Reuters LPC, a sister service of Buyouts that tracks the loan market. The Credit Suisse vehicle, named Madison Park VII, secured among the strongest pricings since the credit crisis.
Another $400 million CLO, being floated by the asset manager BlackRock Financial Management, is expected to price on May 12, and Citigroup provided price guidance late last month of Libor+125 for the AAA tranche of that issue, which is called BMI CLO I, according to LPC.
In the depths of the credit crisis, spreads were as wide as Libor+650, according to data from Citigroup Inc, bringing CLO formation to a halt. The tightening spreads indicate that CLO market conditions are improving, Randy Schwimmer, a senior managing director and the head of capital markets at the lender Churchill Financial Group LLC, told Buyouts.
“Liability costs continue to come down. The recent CSAM deal showed that triple-A spreads are now at the L+125 level,” Schwimmer wrote in an e-mail message. “That’s a short hop to L+100 which is the level most structured finance pros point to as when the CLO arbitrage for equity investors becomes economical.”
CLOs are a form of derivative, whose managers package a number of leveraged loans into new debt securities in tranches with varying levels of risk and return and sell them to investors seeking current income and yield. JP Morgan said in a report in April that it expects CLO issuance to reach $10 billion to $15 billion this year. According to Citi, $4 billion in CLOs were issued in 2010. CLO issuance peaked in 2006, estimated at more than $97 billion.
Participants at the Buyouts New York conference in late April talked of additional issuers coming to market with CLO vehicles, including
Spreads in the leveraged loan market have narrowed significantly since the second half of 2010, and new money, coming from mutual funds and other income-oriented investors seeking higher yields, has put pressure on lenders to find ways to put more money to work. To some extent, that has led to a logjam, because slumping borrower demand in the first quarter only put additional downward pressure on spreads. (Investor pushback led to slightly wider spreads in March, according to LPC.)
“But hopefully that trend will stabilize as new deal flow emerges later this quarter,” said Schwimmer of Churchill Financial. “So we’re headed in the right direction, but it will take a while for the logs to start really flowing downriver.”
CORRECTION: Highland Capital Management was misidentified as Highland Capital Corp. in a version of this story originally posted on May 5, 2011.