United States: US CLO Market Review

Last Updated: October 1 2019
Article by Mark Matthews and Nicola Bashforth

Issuance for the US CLO market for the year to date has been fairly steady notwithstanding a slow start in January.

Banks' predictions at the start of 2019:

  • Bank of America Merrill Lynch: US$105 billion (US$100 billion in refis and resets)
  • Deutsche Bank: US$110 billion (US$80 billion in resets, US$40 billion in refis)
  • J.P. Morgan: US$130–140 billion (US$100 billion in refis and resets)
  • Morgan Stanley: US$90 billion base case (US$30–60 billion in resets)
  • Nomura: US$110 billion (US$130 billion in refis and resets)
  • Wells Fargo: US$110 billion (US$100 billion in refis and resets)

While the issuance dollar value itself is down by more than US$10 billion (see "highlights" overleaf), the number of priced new issue deals (168) is, in fact, just one less than the number for the same period last year (169) as a result of participants preferring deal size in the US$400-500 million range. Indeed, only one US$1 billion plus deal has priced to date in 2019 (Elmwood CLO II) compared with eight in the same period in 2018. The significant decrease in the number of refinancing and reset deals has also meant that overall market activity has been slower.

Market performance is in line with the banks' predictions for new issuance, which was in the US$100-110 billion range. Banks that predicted US$130 billion and above have revised down predictions to US$115-125 billion. In terms of refi / reset activity, with only just under US$32 billion of issuance year to date, there seems limited chance that the US$100+ billion prediction will be achieved unless AAA pricing comes in to make conditions for refinancing more attractive for the current crop of deals eligible to refinance. As early as the end of January, BAML had reduced their forecast from US$100 billion to US$55 billion, while Wells Fargo revised down its refi / reset forecast from US$100 billion to US$45 billion at the end of Q1 2019.

Four new managers have entered the post-crisis BSL CLO market at the time of writing in 2019: Birch Grove Capital, Elmwood Asset Management, Goldman Sachs Asset Management and Whitebox Capital Management. Audax Management Company, FS KKR Capital, Pennant Park and Owl Rock Capital have also debuted as new 2019 middle market issuers. We are aware of several other debut managers with deals in warehouse or in the process of setting up their management business; clear signs of a continued appetite to launch new CLO businesses. See our article (The New Manager Landscape) on page 19 for further details.

Below are some of the highlights so far for 2019 :

  • As at 31 August 2019, US$81.67 billion from 168 deals compared to US$92.45 billion from 169 deals in the same period in 2018. New issue total in 2018 was US$128 billion across 241 deals. Although the number of deals to date is practically on par with last year, and notwithstanding the general uptick seen annually from Labor Day through to Thanksgiving, there would need to be another 73 new issue deals pricing before year end to match 2018 levels.
  • Refi and reset activity accounted for another US$39.5 billion in issuance from 70 CLOs in 2019 as at 16 August 2019.
  • Over 101 managers have issued a new US CLO (BSL and MM).
  • AAA pricing started the year around 130-135bps, followed by a slight increase to the mid to high 130s around the end of Q1, but numbers are now back around the low 130 bps for seasoned managers.
  • So far this year, CIFC and Octagon lead the pack as the the most active managers, each having priced 5 new issue CLOs to date.
  • In the Cayman Islands we acted on the first US CLO transaction (BCC Middle Market CLO 2019-1) to utilise a Cayman Islands LLC as its issuer and advised in respect of the novel listing of the debt securities on the Cayman Islands Stock Exchange.
  • LIBOR / SOFR (Secured Overnight Financing Rate) debate continues but a number of deals have now closed where the documentation includes provisions to transition to SOFR (with a spread adjustment) if LIBOR is no longer the quoted rate.
  • We have seen several recent US CLO transactions incorporating a feature known as a modifiable and splittable or combinable tranches (MASCOT) structure – for more on this topic, see the detailed article at page 13.

Overall 2019 Outlook

The remainder of 2019 should continue to be steady with an expectation for increased refi activity, especially in relation to the 2016 CLO vintage, and there is a general view that spreads will tighten somewhat in Q3 and Q4. 2019 will remain a solid year and generally in line with the bank arranger predictions. The solid performance in 2019 is slightly tempered by an expectation that global macroeconomic conditions and increased underlying collateral volatility in 2020 may result in a slowdown.

* Sourced from LCD, Wells Fargo reports, Creditflux and SCI.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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