News in brief

Managers look to sell double B-rated CLOs at par again

In a sign of the bullishness of CLO debt investors, early 2023 has begun to see a significant portion of the market for double B-rated paper issue at par.

BlackRock’s Magnetite CLO XXXIV was first out the gate, printing at 850 basis points flat on 18 January. Oak Hill’s OHA Credit Funding 14 is also in the market seeking a double B print of 800bp at par.

The trend is another reversal for the market relative to 2022. Last year just 37 new US CLOs sold double Bs at par, and only two of those priced in the second half of the year (Palmer Square CLO 2022-5 in August and Invesco CLO 2022-3 from September). 800bp would also match Palmer Square 2022-5, which was the tightest double B print for a five-year reinvestment CLO in the second half of 2022.

A research paper from Barclays in late January found that double Bs were the outperforming rating band within CLOs for the first month of 2023, but pointed out that these bonds are more exposed to fundamental deterioration in the loan market.

“We believe that the bottom part of the stack, particularly triple Bs and below, will likely remain volatile in the near term amid macroeconomic uncertainty,” wrote Barclays’ analysts Keyur Vyas and Jeff Darfus.

Sources say that CLO managers are using the opportunity of high demand from debt investors to push the envelope on deal structures, adding more leverage and credit enhancement where they can.

The Magnetite CLO, for example, had double Bs attach at 10.05%, while the upcoming Oak Hill CLO is marketing similarly-rated notes at 9%. However, the BlackRock double Bs are thinner.

CLO M&A hits new heights with anticipated Assured deal

Last year saw a record M&A volume centred on credit asset managers, with a study by Gapstow revealing the total assets under management of acquired firms was $326 billion, compared to $140 billion in 2021.

In the same period, acquisitions of CLO platforms increased sharply from a historical average of $5 billion to $33 billion, a figure that includes Carlyle’s purchase of CBAM ($15 billion), Investcorp’s acquisition of Marble Point ($8 billion) and Owl Rock’s buy-out of Wellfleet ($7 billion).

One of the biggest ever CLO transactions is also on the cards, with Creditflux reporting last month that Sound Point Capital Management is in talks to take on the CLO management business of Assured Investment Management. A deal would take Sound Point’s CLO AUM to over $36 billion globally, making it the fifth-largest CLO issuer.

Assured bought into CLO management in 2019, buying BlueMountain Capital Management for $160 million. Since then it has stripped away other parts of BlueMountain’s credit business and morphed the firm into a CLO manager/investor, underlining how acquirers see value in CLO businesses over other parts of credit.

Gapstow data shows that the three biggest M&A deals of 2022 involved CLO firms: Guardian Life’s minority purchase of HPS Investment Partners; Franklin Templeton’s purchase of Alcentra; and First Eagle’s purchase of Napier Park Global Capital.

New York lifts limit on pension alternatives to 35%

New York pensions have been granted the ability to elevate their alternative investment allocations from 25% to 35%. This comes after New York governor Kathy Hochul signed a bill on 23 December that lifts the “basket clause”.

Investments into alternatives (which largely comprise private credit, hedge funds, real assets and private equity) have been growing over the past decade, and the trend has been accelerated by the coronavirus pandemic.

Investment consultants say that such investments often offer a more attractive risk-return profile than traditional asset classes, and provide diversification benefits and lower correlation with vanilla investments.

The largest public pension in the US, California Public Employees’ Retirement System increased the upper limit for its alternative bucket from 22% to 33% from June last year.

New York is home to some of the US’ largest pensions, including New York State Common Retirement Fund, New York City Retirement System and New York State Teacher’s Retirement System.

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Global credit funds & CLO's

February 2023 | Issue 252

Published in London & New York.