A total of four new issues and two refinancings priced during the holiday-shortened week in the U.S., while a new issue from PGIM and a refinancing of GSO’s Clarinda Park CLO were completed in Europe.
Year-to-date totals:
• U.S. — $39.36 billion from 78 deals, versus $39.49 billion from 70 deals in the same period last year.
• Europe — €9.42 billion from 22 deals, versus €8.32 billion from 20 deals in the same period last year.
• Global — $50.03 billion from 100 deals, versus $49.76 billion from 90 deals in the same period last year.
U.S.
CLO arrangers have increasingly been utilizing more bespoke structures to attract investors at the senior part of the capital stack with a number of never before seen features being used in recent weeks to help syndicate new issues.
Credit Suisse on April 18 priced the $405.1 million Ocean Trails VII CLO for Rothschild’s Five Arrows North America unit with exchangeable AA and single-A rated notes allowing the single investor to hold different combinations of principal-only and interest-only notes. Credit Suisse is using the mnemonic of Modifiable and Splittable/Combinable Tranche, or MASCOT, to describe the exchangeable notes.
Five Arrows used the sponsor route for the deal and is also retaining a vertical slice of the Ocean Trails VII to comply with risk retention in the European Union. The vehicle has a four-year reinvestment period.
This innovative structure follows J.P. Morgan on April 11 issuing a combined AAA and AA rated tranche in loan form for the benefit of its investor in the new issue for Nassau Re.
Elsewhere, CIFC priced its third new issue of the year with an average AAA of 139 bps, AAs at 185 bps, single-A at 265 bps, BBBs at 370 bps, and BBs at 725 bps. Its previous new issue with a five-year reinvestment period priced its comparably rated tranches at 135 bps, 180 bps, 270 bps, 375 bps, and 715 bps, respectively, in mid-February.
For Neuberger Berman, its latest new issue priced its floating AAAs at an average of 135 bps while including a small fixed-rate coupon making up almost 2% of the AAAs that priced at 4.18%. The AAs priced at 195 bps, single-A at 270 bps, BBBs at 370 bps, and the BB tranche at 675 bps. Its prior new issue in the last week of January comparatively priced down the capital stack at 133 bps, 185 bps, 265 bps, 385 bps, and 700 bps, respectively.
Palmer Square priced its second non-reinvesting “static” CLO of the year this past week. The $499 million Palmer Square Loan Funding 2019-2 priced its AAAs at 97 bps, AAs at 160 bps, single-As at 225 bps, BBBs at 325 bps, BBs at 560 bps, and the single-B tranche at 715 bps. Its prior static CLO in early March priced its comparable tranches at 105 bps, 165 bps, 225 bps, 315 bps, and 580 bps, respectively.

Ten-day Golden Week holiday in Japan
Just as market participants return from the Easter holiday in the U.S. and Europe, CLO managers will have to contend with the Japanese financial markets shutting down for 10 consecutive days starting on Saturday, April 27 through Monday, May 6. The Golden Week is longer than normal this year because of the abdication of Emperor Akihito.
As a result, new issues being sold to investors in Japan will have to be completed this week or else be put aside to be finished later in May.
“You don’t price deals with Japanese investors during Golden Week,” one CLO banker said.
Insufficient loan supply to ramp new CLOs
Holidays aside, many CLO managers are being hampered by a primary loan market that either hasn’t been providing enough supply to fill the warehouses of upcoming CLOs or else issuance that is not suitable to be purchased by them.
Year-to-date volume for institutional loans has so far totaled $88 billion, according to LCD data, representing a nearly 44% drop from the $156 billion at this point last year.

Opportunities have also increasingly disappeared in the loan secondary as the average bid on the S&P/LSTA Leveraged Loan 100 Index is at 97.35, recovering after dipping as low as 96.37 at the end of March from a previous high of 97.08 earlier in the month. The index started 2019 at 93.84.

Europe
The European CLO market continues to be busy on the supply front. Deutsche Bank on April 17 priced the €409.8 million Dryden 69 Euro CLO for PGIM, after BlackRock on April 12 priced its eighth European CLO, the €408.5 million BlackRock European CLO VIII. Also, Bank of America Merrill Lynch on April 18 priced the €334 million refinancing of the Clarinda Park CLO for Blackstone/GSO Debt Funds.

The European CLO market has now issued €9.42 billion from 22 deals (excluding resets), versus €8.32 billion from 20 deals during the same period last year. With such a large amount of supply it is no wonder that liability investors continue to call the shots and that arbitrage challenges remain a concern.
“The arbitrage continues to be stretched due to the strong supply of CLO issuances, while at the same time the pipeline for leverage loans looks thin,” says Nikunj Gupta, Head of European New Issue CLOs at Deutsche Bank. “We would need at least another 25 bps more spread on the asset side or the WACC would need to come down to 175 bps.”
Indeed, the WACC on current deals is between 190–205 bps, according to LCD data. Dryden 69 has a WACC of 199.86, and as with other transactions this year, the manager is taking advantage of various pockets of demand by including junior and fixed-rate tranches. “The floating AA and A printed at tight levels, but for the lower rated tranches the market is still fairly fragile,” says Jonathan McCormick, Head of European ABS/CLO Syndicate at Deutsche Bank. The AAAs on the deal were anchored at 108.5 — in line with previous deals, while also featuring a junior floating-rate AAA tranche that priced at 140 bps and a fixed-rate tranche pricing at 1.25%.
The €408.5 million BlackRock European CLO VIII that priced via Natixis also had its AAAs anchored at 108.5, while including fixed- and floating-rate tranches, including some with a step-down after the non-call. The WACC was 193.72, with one arranger commenting that the dynamics are getting slightly more competitive with more demand coming from liability investors as they fear CLO debt spreads could soon tighten. This may not last too long though. “There is some additional demand as investors have some new cash that they can deploy, but that is going to get burned through quickly,” adds Gupta.
Some managers hope that the loan pipeline will pick up now that Easter has passed, with deals such as RPC, Scout24, and Evonik expected. The forward calendar for the European leveraged loan market stands at €11.99 billion this week, of which €8.7 billion is institutional debt.

What most market participants agree on though is that CLO supply in the second half of 2019 is going to slow as the pace of new warehouses opening has also slowed, according to various arrangers, while the backlog from last year has almost been worked through. In theory this should create a more balanced market.
The €357.7 million Voya Euro CLO II via Citi for Voya Alternative Asset Management is targeted to price in April, according to sources. The deal is the manager’s second European CLO
Source：LCD