U.S. CLO issuance passes $67 billion mark; A, BB secondary spreads firm 30 bps on month

By Cristal Cody

Tupelo, Miss., Nov. 6 - U.S. CLO issuance hit more than $67 billion year to date with new deals priced in November, including GSO/Blackstone Debt Funds Management, LLC's $413.35 million Keuka Park CLO, Ltd. transaction sold the previous day, sources said on Wednesday.

The issuance through the first 10 months of the year is the third-highest year on record, according to Dave Preston, an analyst with Wells Fargo Securities, LLC.

"October U.S. CLO [broadly syndicated and middle market] primary volume was $7.6 billion, the third-highest monthly total in 2013," Preston said in a report on Wednesday. "U.S. CLO primary market volume looks poised to meet our issuance target of $70 billion."

The 2014 primary market is projected to see about $60 billion of U.S. broadly syndicated CLO issuance, he said.

In the middle-market CLO sector, 13 CLOs totaling $4.9 billion have priced year to date, higher than the $4.2 billion priced in 2012, Preston said. Middle-market CLO AAA tranches have priced 25 basis points to 50 bps wider than broadly syndicated CLOs over the year, he said.

"This gap has narrowed in September and October as recent middle-market CLO AAA tranches have priced in the 175-bps range, compared to 145 bps-150 bps for BSL CLOs," he said.

About $4.5 billion of middle-market CLO issuance is forecasted in 2014, he said.

A, BB spreads firm

In the secondary market, U.S. broadly syndicated CLO spreads remain wider at the top of the capital stack and better at the bottom, sources report.

AAA secondary spreads on average are in the 145 bps to 147 bps plus Libor area, sources said.

A-rated and BB spreads, meanwhile, have both moved in about 30 bps on the month, Preston said. A-rated spreads are trading in the 310 bps plus Libor area and BB tranches traded in the secondary market in the 620 bps plus Libor area.

"Although middle-market loan spreads have tightened somewhat in the past two months, BSL loan spreads have been stickier in the past three months," Preston said. "However, BSL loan spreads in the BB sector tightened in July and August."

Most of the secondary activity in 2.0 CLOs is in the "higher beta tranches, and equity continues to be well bid," Preston said. "With an active primary market, some investors are selling higher beta tranches."

Legacy CLO runoff eyed

Elsewhere on Wednesday, Resource Capital Corp.'s revenue and profit from its syndicated loan business will decline "severely" with the runoff of legacy CLOs, Jonathan Cohen, president and chief executive officer of Resource Capital, said during the company's third-quarter earnings conference call on Wednesday.

"This runoff has affected the second and third quarters and will affect the fourth quarter of 2013 as well," he said. "Two of our legacy CLOs Apidos I and Apidos III together have seen a decline of $143.3 million in investment assets combined since year-end 2012. This has reduced cash flow by $3.2 million versus the comparable nine months in 2012. This business has been an excellent investment for RSO and its shareholders."

Cohen said the firm's Whitney CLO I, Ltd., sold in 2004, was called in early September and was substantially liquidated during the third quarter and Apidos VIII was called and liquidated in October.

In addition to the portfolio of syndicated bank loans, the New York City-based specialty finance firm also collects management fees from its acquisition of the right to manage three CLOs, which earned the firm net fees of $1.2 million during the quarter.

Also, David Bryant, chief financial officer of Resource Capital, said on the call that the firm's two real estate CDOs and five bank loan CLOs as of September generated strong cash flow in 2013.

"Bank loan CLOs generated approximately $29.6 million of cash flow during the nine months ended Sept. 30," he said. "This improved cash flow reflects a very benign credit environment, as well as our ability to invest recycled capital."

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