LPC: CLO volume hits 2016 high in October on increased demand

By Kristen Haunss

NEW YORK, Nov 3 (Reuters) - Sales of Collateralized Loan Obligation (CLO) funds hit a monthly high of US$8.4bn in October and was the biggest month of issuance since June 2015, as increasing demand from new investors helped to boost issuance before looming regulations.

GSO Capital Partners, the credit investment arm of Blackstone Group, and Carlyle Group were among firms that issued CLOs in October with some of the tightest spreads this year. CLO tranches offer higher interest rates than other investment-grade products, which are attracting investors facing negative yields elsewhere.

"The increase in volume in the market is reflective of investor confidence in US senior secured credit and continued worldwide appetite from new investors in the US and Asia for attractively priced floating-rate assets," said Tom Majewski, founder of Eagle Point Credit Management, which invests in the equity and junior debt of CLOs.

Despite the recent pickup in volume, issuance for the year to date is just US$55.3bn, 36% lower than the same period in 2015, according to Thomson Reuters LPC Collateral, as the market gets ready to implement risk-retention rules in December that require managers to hold 5% of their funds. Volume has also been depressed by a dismal January when only two deals were arranged.

The last two months have been a bright spot with October's issuance preceded by US$8.24bn in September, which was the second biggest month of the year, according to the data.

Investors looking at the CLO market are attracted to Triple A tranches that pay 142bp, compared to a similarly rated five-year, non-agency commercial-mortgaged backed security for 58bp as of October 24, according to Wells Fargo (Hanover: NWT.HA - news) data.

There is currently strong demand from investors across the capital structure, said Sajid Zaidi, head of US secured lending and CLO new issue at Morgan Stanley (Xetra: 885836 - news) in New York.

"Some investors that had taken a pause late last year have come back into the market and that has been a factor in driving new issuance," he said.

Increasing investor interest is driving spreads on the most senior tranches lower, which can help boost payments to equity investors in the most junior and riskiest part of the funds, who are paid last with whatever is left over after CLO bondholders receive their distributions.

This is a welcome development as equity distributions have otherwise been falling as Libor rises because most loans have a Libor floor, a minimum interest rate borrowers must pay investors, while CLO tranches do not. While the amount that CLOs must pay their debt investors increases, the amount of interest received stays the same.

CLOs pool loans of different credit quality and sell slices of the fund of varying seniority, from Triple A to B to investors including insurance companies.

The influx of new investors has pushed spreads on Triple A debt, which is the largest and most senior portion of the fund, tighter. Triple A spreads averaged 143bp on October 28, down from a 2016 high of 161bp in June, according to Morgan Stanley data.

A GSO CLO that priced with BNP Paribas (LSE: 0HB5.L - news) in the first week of November had the tightest pricing for a non-static deal this year, sources said. The US$357.5m Triple A slice of the Bristol Park fund pays investors a spread of 142bp over Libor.

Momentum due to the tightening in liability spreads and looming risk-retention helped to boost CLO issuance in October, said Brad Rogoff, head of credit strategy at Barclays (LSE: BARC.L - news) . (Reporting by Kristen Haunss; Editing by Tessa Walsh)