CLOs and loans find footing as post-Sofr trends emerge

Hugh Minch

Reporter

The US leveraged loan and CLO markets transitioned to a new base rate from 1 January without the lengthy issuance pause that was widely predicted in the months leading up to the switch.

Market participants described the change from Libor to Sofr as “confusing”, but say the years of work put in has allowed the transition to occur without significant disruption.

AGL Credit Management was one of the first managers to print a new five-year reinvestment CLO, on 24 January. The firm’s chief operating officer Wynne Comer describes the market for CLO liabilities and equity as healthy.

“We’re pleased the transition has happened without too much stress,” Comer says.

Some loan issuers are looking to trade off the credit spread adjustment of 10 basis points for one-month Sofr, 15bp for three-month Sofr and 25bp for the six-month rate.

But not all deals include a sliding adjustment across tenors: some high quality loans instead offer more original issue discount to make the economics similar to what a Libor loan would pay, while others feature a 10bp adjustment across the term curve. Moreover, some loans include a Sofr floor, while others do not.

“CLO liabilities have gotten rid of the credit spread adjustment”

Wynne Comer, Chief operating officer | AGL Credit Management

Meanwhile, CLO liabilities have removed the credit spread adjustment altogether, says AGL’s Comer.

“There was a question over whether the CLO market would have two numbers for each tranche, with a Sofr adjustment from Libor plus a spread,” Comer adds. “But very quickly the market moved to one number.”

One arranger tells Creditflux they were wrestling with manager tiering, and that the spread differential between top-tier and second-tier managers was still up for negotiation.

Many of the Sofr-linked CLOs printed in January came from managers that typically score tighter liability spreads at the top of the capital structure.

Sources say equity investors working with lower-tiered managers are concerned about pricing their triple As too far wide of where spreads will move, and will wait for the market to evolve before executing a new deal.

Palmer Square Capital Management priced the first Sofr-linked CLO with a static pool issued on 14 January, while the first five-year structure came when AB refinanced its debut broadly syndicated CLO on the same day. The first new issue, Zais CLO 18, came to market on 20 January via Jefferies.

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Global credit funds & CLO's

February 2022 | Issue 242

Published in London & New York.