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News in brief
News in brief
September 2023 | Issue 257
Spread tightening creates space for smaller CLO issuers
CLO liabilities tightened sharply through July and August in the secondary market, led by triple A tranches that now trade at around 150 basis points over Sofr. The improved market sentiment follows forecasts of a soft landing for the US economy, and improved projections for the leveraged loan default rate.
The spread tightening has created space for small firms to print CLOs, including first-time issuers. 55% of new issue transactions priced in August came from firms with three CLOs or fewer under management.
AGL Credit Management’s David Preston believes CLOs were cheap for too long. “The macro credit environment has improved and people have more clarity on the Fed’s outlook,” he says. “There will be increased appetite for floating rate assets if you don’t think we will have significant rate cuts in the next nine months.”
Tightening in the secondary market slowly bled through to primary, easing some of the pressure on an equity arbitrage that had challenged issuance.
BlackRock is leading the way by marketing a new CLO via Nomura, Magnetite XXXVII, with triple As in the low 160s. The average print in the first quarter was around 30bp wider.
Preston: ‘The macro credit environment has improved’
Lumen Tech downgrade leads to estimate that 9% of CLOs could breach OC tests
One of the most widely held names in US CLOs was downgraded in August. S&P carried out a two-notch downgrade of Lumen Technologies on 16 August from B to CCC+, citing the telecommunications firm’s weak performance and unsustainable capital structure that includes “significant debt maturities in 2025 and 2027”.
Downgraded entities include Lumen, CentryLink and Level 3. The total term loans represent $6.4 billion of exposure within the loan index, according to Bank of America research.
“The total CCC to C exposure in the US loan market now goes up by around 50 basis points to 7.7% or $108 billion in notional,” wrote BofA analysts Pratik Gupta, Chris Flanagan and Victoria Xu in a research paper in August. “Based on this increase, we estimate the share of total deals that could breach their OC test increases to 9% from 4.6%.”
BofA added that CLO managers may sell higher-priced triple C assets following the downgrade.
According to CLO-i data, Lumen is the sixth most widely held name in CLOs, with total holdings of almost $4.5 billion across 1,420 CLOs. Almost every manager is exposed, but Blackstone, Octagon, Ares and KKR are the four with the greatest aggregate holdings.
Appeals court and SEC rule in favour of CLO market
The US CLO market breathed a sigh of relief in August as two major regulatory rulings went in its favour.
First off, the Second Circuit Court of Appeals ruled in favour of JP Morgan that term loan Bs are not securities. An opposite ruling would have imposed significant compliance costs as the asset class would have been subject to securities laws.
The Loan Syndication and Trading Association described the ruling as a “great — and critical — result for the leveraged loan market”. It said: “We are gratified that the SEC declined to submit a brief and that the court adopted the long-standing view that syndicated term loans are not securities.”
The second major ruling came down from the SEC, which granted an exemption for CLOs in its new Private Fund Advisers Rule. The rule imposes onerous disclosure and reporting requirements on funds, and the full impact for other credit funds is still being digested. But CLOs and other securitised assets will be celebrating.
The LSTA welcomed the exemption of CLOs and securitised assets funds. “The proposed rule would have imposed significant additional disclosure obligations that are of no value to CLO investors and would have prohibited or limited many important practices that are standard.”
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Global credit funds & CLO's
September 2023 | Issue 257
Published in London & New York.
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