Triple A CLOs discounted by 0.5 cents as spreads widen

Hugh Minch

Senior reporter

Selling triple A CLOs in primary at a 0.5 cent discount has emerged as one way for managers to get new transactions over the line amid a tough outlook for issuers.

Many analysts forecast a normalisation of CLO liability prices in 12-18 months, but triple A investors are worried that, without an OID, their primary investments may see less price appreciation in that period than assets sourced in the secondary market.

Creditflux understands Marathon CLO 18 is among the July deals where the triple As were sold at an OID of around 99.5 cents on the dollar. The static CLO priced on 14 July via Bank of America, with a triple A coupon of Sofr plus 222 basis points. A spokesperson for Marathon declined to comment.

While OIDs can entice triple A buyers, they may be off-putting to equity investors, who are seeing a tighter arbitrage than earlier in the year. “Having every transaction OID puts significant pressure on the capital stack,” said Olga Chernova, chief investment officer at Sancus Capital Management, speaking at SFVegas 2022 conference last month. She added that the use of an OID also increases the amount of equity required in a transaction, “so deals have been getting smaller”.

“OIDs increase the amount of equity required, so deals have been getting smaller”

Olga Chernova, Chief investment officer | Sancus Capital Management

Discounts on CLO triple As are particularly attractive for short-dated deals because they enable debt investors to rapidly benefit from capital appreciation.

The spread between primary and secondary CLO triple As was briefly as wide as 40 basis points in May and remained around 20bp as recently as early June, before primary yields began to widen meaningfully in early July. Primary spreads for three-year reinvestment CLOs then widened 16.08bp in the first three weeks of July.

“Some triple A investors have a settlement delay of over six weeks. This is another settlement drag making the secondary market attractive,” said Chernova.

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Global credit funds & CLO's

August 2022 | Issue 248

Published in London & New York.