CLO Weekly Wrap: European Tranche Market Rallies While US Enjoys Short-Lived New Issue Break

With the week falling between Juneteenth and July 4th, the CLO primary market was uncharacteristically quiet last week in the US, with no new issues pricing for the first time since January. Instead investors turned their focus to refinancing and reset transactions.

Following this week’s holiday, the quiet spell is likely to be short-lived. Most CLOs are set to determine their next quarterly payments in early July and sources say that triple-A amortizations could reach $30 billion at the end of the month. August would then see cash-flush investors ready to redeploy, similar to May which was one of the busiest months in CLO market history.

The European market meanwhile saw multiple new transactions. Liability tightening on the continent has lagged the US but the last 15 days saw a rally in the European tranche market. Fidelity Grand Harbour CLO 2024-1 capitalized on this, with triple-As at year-to-date tights of EURIBOR+ 131 bps and a 193.28 bps cost of capital. Last week’s new issuance can be seen in the table below:
 

Sources say that CLO equity remains an appealing investment in today’s market, despite the loan repricing wave in June squeezing the arbitrage. Outflows from retail funds have led loans to soften as well. The Morningstar LSTA Leveraged Loan Index had an average bid of 96.84 cents at the end of last week, down from the June high of 97.3.

Despite these challenges, investors are confident that the 2024 vintage of CLOs should be a strong performer. Kevin Raymond, co-portfolio manager of CLOs and leveraged loans at Vibrant Capital Partners, says that the loan market has skewed higher quality over the last three years.

“In 2018 when LBO activity was higher, you had a lot of aggressive deals make their way into CLOs” Raymond said. “Right now the cost of capital is so high that the amount of leverage private equity sponsors can put on a business is lower than in 2018. We’re not seeing such aggressive deals come to market and the quality of loans going into CLOs is higher”.

Last week’s CLO reset activity can be seen in the table below:
 

Further into the future, the level of activity in the CLO warehouse space implies a strong pipeline for CLO formation going forward. US Bank reported that it opened 13 new warehouses in May and had 85 open in total at the end of the month, which also saw 11 warehouses closed to CLOs and three rolled into existing deal upsizes or refinancings. One warehouse was terminated during the month.

Meanwhile Maples Group revealed last week that it had 108 warehouses open which is an increase of 25% since October 2023. The firm added that warehouse periods had shortened to just six to eight months since October, when the average period was around nine months, due to better market conditions.

“We are also seeing third-party equity investors, who will ultimately participate in the CLO mezzanine or equity, invest directly into the warehouse prior to the CLO phase” Maples wrote in the paper.

Last week’s CLO refinancing activity can be seen in the table below: