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June 2021 | Issue 235
No labels mean CLO triple As refuse to budge as mezz rallies
Sayed Kadiri headshot
Sayed Kadiri
Senior European CLO spreads are stuck in the mid 80s as mezzanine tranches rally, with market participants bemoaning the lack of depth in the triple A investor base relative to ABS products.
Creditflux data shows that reset and new issue European CLO triple As priced at 86.2 basis points in May, which is 4% wide of April levels. But double As have tightened 7.3% (to 158.7bp), while single As have come in by 8.4% (to 208.6bp).
The head of CLO origination at a large bank says subscription levels on new issue CLOs might paint a pretty picture, but the pricing is fragile. “You might see a triple A tranche being marketed at 82bp and 100% subscribed, but if you flex that to 81bp the order book evaporates.”
“The CLO 2.0 net outstanding amount has almost doubled”
Luca Pantaloni, Head of ABS and CLO management | P&G
A drawback for CLOs versus European ABS is the lack of an STS (simple, transparent and standardised) label. The better capital treatment on STS products draws in a range of investors, particular for highly rated paper. Domi 2021-1, a Dutch buy-to-let RMBS, highlights the power of STS. It priced senior notes at 63bp over Euribor, about 10bp inside initial price talk.
Debtwire reported that banks (which stand to benefit most from STS) only made up 14.6% of the buyer base on this deal, indicating that liquidity is as important as capital treatment.
But Luca Pantaloni, head of ABS and CLO management at P&G in Milan, says the European CLO market is on stronger footing than it was during the tights of 2018, pointing out that the investor base has grown in sync with the asset class.
“The CLO investor base is constantly growing, but the market is growing too,” he says. “Today, CLO primary spreads are similar to those during the summer of 2018, while iTraxx Crossover and cash high yield in the low-mid 300s are wider.
“In the meantime the CLO 2.0 net outstanding amount has more than doubled from roughly €95 billion in 2018 to roughly €195 billion.”
Given the flatness of the CLO term curve, Pantaloni prefers refi paper and short-dated secondary opportunities. He also likes deep mezzanine tranches of vintage peripheral ABS and RMBS with higher credit enhancement and lower loan-to-value levels.
“There are often other attractive options attached: call optionality, pro-rata payments and convexity,” he says. But such profiles are not easy to find.
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Global credit funds & CLO's
June 2021 | Issue 235
Published in London & New York.
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