Euro CLOs aim for senior spreads as low as 150bp

7 min read
Richard Metcalf, Robert Hogg

CLO managers are marketing the first CLO new issues and resets of the year with initial price thoughts for Triple A rated debt as low as 150bp-155bp, compared with the 170s for the last deals of 2023, potentially indicating an improvement in arbitrage.

Investors are being asked to consider new CLOs from Sound Point, Fidelity International and Whitestar Asset Management and resets of 2022 deals from Bain Capital and Palmer Square, say market participants.

The Class A notes of some of the deals are already subject or listed as "call desk" but IPTs have been circulated at 150bp-155bp for the senior notes of the €399m Sound Point Euro CLO X new issue and at 155bp-160bp for the €408.5m Fidelity Grand Harbour CLO 2023-2 offering, according to market sources. That is as much as 20bp tighter than the senior spreads on the euro CLOs that priced in December.

The pricing move has been supported by recent action in the secondary market, where auctions of CLO notes have been well received. "There is definitely good demand across the capital structure in the last couple of weeks," said Sharad Vohra, a partner at Astra Asset Management.

As CLO bond spreads tighten, it allows more of the cash from the underlying loans to trickle down to equity holders and investors say this dynamic could encourage more managers into the market.

"It’s been an encouraging start from both a new issue and a reset perspective," said Vohra, "although we continue to be cautious on CLO equity given the run-up in the markets, in particular the underlying loan prices, and think there may be better entry points in CLO equity as new issuance ramps up and the weighted-average cost of debt improves."

Not everyone is waiting for a better entry point, however. Sound Point is aiming to place all of the equity in Sound Point Euro CLO X apart from its 5% risk retention, a rare move in the past 12 months, and it is almost two times subscribed already with 10 accounts having expressed interest in the transaction, according to a source with knowledge of the deal.

As for the rest of the capital stack, Sound Point is marketing the Double A rated Class B notes of the deal in the area of 220bp, the Single A rated Class Cs in the very high 200s, the Triple B rated Class Ds in the low-mid 400s, the Double B rated Class Es in the low-mid or mid-700s, and the Single B rated Class Fs in the mid-900s.

A second CLO investor said the Double B rated notes looked attractive at those IPTs, especially with the crossover index trading at around 340bp.

The deal is expected to have a two-year non-call period and a five-year reinvestment period. The warehouse is more than €200m ramped and the portfolio is already up €3.2m on a mark-to-market basis, according to the source with knowledge of the deal.

Sound Point Euro CLO 10

ClSize (€m)S/FCE (%)CpnIPTs
B44AA/AA273mE+220 area
C22.4A/A21.43mE+Very high 200s
D27.6BBB-/BBB-14.53mE+Low-mid 400s
E18BB-/BB-103mE+Low-mid/mid 700s
F14B-/B-6.53mE+Mid 900s

Whitestar is marketing the mezzanine notes of Trinitas Euro CLO VI at similar levels via sole arranger Morgan Stanley. The Class A and floating-rate Class B1 notes are subject and the deal also features a fixed-rate Class B2 tranche being marketed at a yield in the low 5s in percentage terms. The proposed non-call period is about 1.5 years and the reinvestment period is about 4.5 years.

Trinitas Euro CLO VI

TrancheSize (€m)Par SubRating F/SWAL (yrs)IPTs
Class A27040.0%AAA/AAA5.7Subject
Class B1 (indicative size)4128.0%AA/AA7.6Subject
Class B1 (indicative size)1328.0%AA/AA7.6Low 5%
Class C30.721.2%A/A8.4290-300
Class D3014.5%BBB-/BBB-9420-440
Class E1810.5%BB-/BB-9.5720-740
Class F13.57.5%B-/B-10Hi 900s

Besides new issues, tighter liability spreads make resets of older deals more attractive and there are at least two such deals in the market. Bain is looking to reset Bain Capital Euro CLO 2022-2 while Palmer Square is out with a reset of Palmer Square European CLO 2022-2, both via arranger Barclays.

Wanted: loans

The second CLO investor was not overly concerned about a widely expected uptick in leveraged loan defaults this year but said that the market needed to see more origination of new loans. "We need to see some of those private equity companies letting go of their companies, taking a little bit of a haircut maybe but selling them, and some new loans coming to the market so that something happens instead of the dog eating its own tail."

There are 15 leveraged loan and high-yield bond offerings set to be launched next week, according to a credit investor. However, most of the activity is expected to be made up of refinancings, amend-and-extend deals and repricings and will therefore not add to the total stock of loans available for CLO managers to buy.

In the absence of new-money deals in the loan market, CLO managers are forced to compete to buy existing loans in the secondary market, putting upward pressure on loan prices. Average bids for the top 40 European leveraged loans are around 98.24, according to LPC data. Last year's peak was 98.09 in late September, before the bids dropped to below 96 in October.

"It all points to supportive data on the secondary side, and you also have CLO dynamics feeding into this downward pressure on yields," said a banker. "The background driver is rates but also the big technical is that supply is pretty depressed and it doesn't feel like there will be any LBO deluge soon."

Updated story: Adds bids for equity in Sound Point CLO, background on secondary market and quotes.