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March 2021 | Issue 232
CLO single B tranche buyers emerge from above and below
Tanvi Gupta headshot
Tanvi Gupta
Head of data journalism
There is growing appetite for single B US CLO notes as some equity buyers move up the stack and some double B buyers delve lower for a spread pick up at a similar risk profile to CLO double Bs.
An equity investor says single Bs have outperformed equity over the past few years. They typically price at 95-98 in new issue, depending on the strength of the market and can easily generate 10-11% returns — a level that some equity tranches have struggled to hit, says the CLO equity investor.
Neil Desai, head of structured credit investments at WhiteStar Asset Management, points out there is a ratings arbitrage between double Bs and single Bs. “Single Bs today in the primary market attach at 7% with an MVOC [market value over-collateralisation] ratio of approximately 106%,” he says. “A similar profile double B would price at 98 cents and 650bp discount margin, whereas a single B could price at 96 with a 900bp DM, creating an arbitrage.”
“There is a ratings arbitrage between double Bs and single Bs”
Neil Desai, Head of structured credit investments | WhiteStar Asset Management
Demand for single Bs has also grown due to the lack of third-party equity available, especially after 2020, which was dominated by CLO managers retaining equity directly, or through affiliates.
$205 million of US CLO single B bonds have listed on CLO-i’s b-wic tracker this year, of which 84% traded. In 2020, $737 million of single B notes were up for sale via b-wics, of which 59% traded.
In the primary market, just 8% of new US CLOs were priced with a single B tranche in 2020, with the largest proportion being in 2018 with 24.5%.
The buyer base for single Bs shrank in 2016 after the oil and gas crisis, claims a CLO manager. He says hedge funds and high yield funds bought these tranches based on subordination and without enough consideration of the underlying portfolio.
Investors point to growing opportunities in the primary market as the refinancing wave hits, with Kayne Anderson taking the unusual step of inserting a single B tranche as part of a refi in late January (Kayne CLO II).
The new issue market, however, is tougher to crack. A New York-based CLO manager says single Bs are still too expensive at the moment and need to tighten inside 800bp.
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Global credit funds & CLO's
March 2021
| Issue 232
Published in London & New York.
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