Global credit funds & CLO's
September 2020 | Issue 227
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September 2020 | Issue 227
Analysis CLOs
It’s been a while — how’s tricks?
Charlie Dinning
Data journalist
Tanvi Gupta headshot
Tanvi Gupta
Head of data journalism
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The primary CLO market has been open since April, but 41 managers have not managed to price a US CLO in over a year and a lack of access to equity capital means they may struggle to return
Although it is a crisis that has led to one of the sharpest ever drops in credit valuations, the coronavirus pandemic has not completely shut the primary CLO market, with 49 US and 23 European managers printing deals since April. In contrast, only four deals priced globally between September 2008, when Lehman Brothers filed for bankruptcy, and December 2009.
Nevertheless, many CLO managers are finding the situation difficult: 41 US managers have not priced a new issue deal in the past 12 months and 16 of those last accessed the primary CLO market in 2019.
Others though have been able to print CLOs since the primary market reopened in early April. In fact, 15 managers in the US and three in Europe have priced more than one deal since April. Of this group, AGL and Redding Ridge are the most prolific issuers in the US, with four new deals apiece since April, while GSO, Octagon, Palmer Square and PGIM have priced three each.
CLO equity capital is key
The prolific issuers all have access to CLO equity capital, which means they can dictate the pace at which they deliver CLOs. Placing CLO equity with third party investors has been difficult this year, with high financing costs and short reinvestment periods proving an unattractive combination. One European CLO manager points out that third party CLO investors have had to contend with performance issues just as CLO managers have.

Another CLO portfolio manager agrees: “Large equity investors were getting marked down and cutting dividends — not many people are looking for new opportunities when there is a fire in their backyard.”

Year to date, AGL is leading in terms of volumes, with $2.6 billion versus $2.3 billion for Palmer Square and $2 billion for Redding Ridge. In Europe, CBAM, GSO and Redding Ridge are the only managers to have priced more than one deal since April. CBAM can celebrate a major achievement considering that its European CLOs are its first and second deals on the continent.
US CLOs: triple A spread quartiles
Source for all data: CLO-i
Total year-to-date issuance by leading issuer AGL
CBAM’s Vendome Funding CLO priced on 5 June and Montmartre Euro CLO 2020-2 followed on 20 July. Europe has welcomed four debutants since April: AlbaCore, BlueBay, CBAM and Palmer Square.

LCM Asset Management and HPS Investment Partners are the largest managers missing from new issue action in the past 12 months in the US. HPS’s last new deal was HPS Loan Management 15-2019, which priced in July 2019, while LCM’s last new issue was LCM 29 in April 2019.

Since their last new CLOs, HPS and LCM have completed two and three refinancings, respectively, and HPS’s European team has been active in new issues: it printed Aqueduct European CLO 5 in July. However, in the past three years, LCM has on average issued a CLO every 3.8 months, while HPS priced one every 5.6 months.

American Money Management (AMMC), Bardin Hill and PineBridge are the largest managers to have abstained from new issues since 2018. In Europe, Sculptor Capital Management is the largest to have not priced a deal in the past 12 months; its last new CLO in Europe was OZLME CLO VI, which priced in May 2019 and was followed by a refi three months later. In the US, Sculptor priced a bond flex CLO and conducted two refis and a reset in the past 12 months.

A New York based CLO manager says that, in the depths of the coronavirus crisis in March and April, it was tough to get approval rights from banks on warehouse structures. “Warehouse capacity was not extended to a lot of CLO managers without an exit plan for equity,” he says. “These managers were not able to ramp up with attractive loans.”

Variations in warehouse strategy also played a part in keeping firms away from the new issue market. A US loan manager says some CLO issuers only go for short-term warehouses with a view to ramping up rapidly in the secondary loan market. “Many of the 2020 deals are from warehouses from last year,” he says. “For managers which prefer short warehouses, print and sprint was an option but meant giving up a significant amount of management fee.”

Print and sprint strategies are also easier to execute for top tier managers. “Few managers can get third-party equity money by telling you exactly where the debt will price and where they can buy $400 million assets immediately,” says the manager.
Consolidation becomes more likely
Should circumstances remain the same over the next few months, some managers will continue to struggle to return to the primary market. At that stage, says a London-based US CLO manager, some parent companies may shift away from CLOs and leave behind orphaned platforms. “This is even more likely if the parent company acts as the sponsor for horizontal risk retention which took a hit in returns,” he adds.
Some believed, even before covid-19 hit, there were too many managers in Europe. There are about half as many European CLO managers as US managers, but the European loan market is about a quarter of the size of its US counterpart.
In the US, some CLO managers anticipate a wave of consolidation next year but predict it will move at a slower pace than during the 2008 crisis. “Small platforms were focused on fixing portfolios, but now the market is recovering and the focus can turn to growth,” says a US CLO manager.
3-year reinvestment period benchmarks 2020
“Now the market is recovering and the focus can turn to growth”
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