CLO primary thin; deal action forecast; weak business services sector negative for CLOs

By Cristal Cody

Eureka Springs, May 11 – CLO deal action remains light so far in May, according to market sources on Wednesday.

“After a strong second half of April, issuance in May has taken off relatively slowly, with three deals having priced in the month so far,” Deutsche Bank Securities Inc. analyst Bjarni Torfason said in a note on Wednesday. “But with a healthy pipeline, issuance is likely to pick up soon. We continue to see spreads on new issue deals move tighter.”

In other activity, Moody’s Investors Service said in a report on Wednesday that weakening in the business services sector is a credit negative for U.S. CLO 2.0s.

The credit quality of some business services issuers, which are among the most widely held types of companies in U.S. CLO 2.0s, has weakened due to their dependence on the energy and commodities sectors, Moody’s said.

“Business services companies are the second most widely held in U.S. CLO 2.0s, with 200 issuers accounting for approximately 12% of total CLO 2.0 collateral,” David Ham, Moody’s senior credit officer, said in a news release. “But the slump in oil prices has seen the credit quality of these companies deteriorate, which in turn is credit negative for the CLOs.”

As of April, 27 of the 291 issuers on Moody’s B3 negative and lower list are business services companies, 22 of which are included in 533 CLO 2.0 portfolios, according to the report, “Exposure to Weak Business Services Issuers Has Grown, a Credit Negative for Some US CLO 2.0s.”

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