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Sam Robinson

The US CLO market roared into life last week as $4.5bn of US CLO new issuance priced across 10 deals, while a further four resets ($1.7bn) were brought to market. There was also $910m of middle-market new issuance across three deals.

Before last week, there had only been $2.6bn of US CLO new issuance in January across six transactions.

This supply of CLO paper did not have a negative impact on liability spreads, however, as Oak Hill Advisors priced OHA 17 with BNP Paribas and achieved a new triple-A benchmark of 148bps.

The print of 148bps is the tightest triple-A tranche for a five-year reinvestment period, two-year non-call US CLO since April 2022, according to 9fin data. Oak Hill also achieved a very tight print on its double-B tranche, which came in at 590bps.

This is the tightest double-B tranche since June 2021, according to 9fin data. However, in 2021, CLOs were priced off of Libor meaning that when the credit spread adjustment is taken into account, Oak Hill’s double-B tranche is actually tighter still.

The tightest double-B print in 2021 was 575bps on AIMCO 14, an Allstate Investment Management CLO. Taking the 26.1bps CSA that the Alternative Reference Rate Committee suggested for the three-month Libor to SOFR transition means that the print of 575bps over Libor becomes 601.1bps over SOFR. This, effectively, makes Oak Hill’s 590bps print the tightest all-in print since 2018.

One source stated that 2024 CLOs are already ‘rich’ in comparison to 2021 levels on every debt rating other than the triple-A tranche.

The pace of CLO liability tightening has been extraordinary as in November, the average double-B coupon on a 5/2 US CLO new issue was 791.5bps. This dropped to 762bps in December, albeit across only four new issues, before dropping below 688.8bps this month, to represent over 100bps of tightening from November.

But this has caused some to question whether triple-As and double-Bs are priced correctly given the narrowing in the basis between the two pricing levels. On OHA 17, the basis between its triple-As and double-Bs is only 442bps and the average this month stands at 527.4bps, according to 9fin data.

In Q4 last year, the average basis was 601.9bps and it was even higher in the early parts of the year as it peaked at 659.8bps in the second quarter. The average basis between the double-Bs and triple-As has not averaged under 600bps since before the start of the Ukraine-Russia war in February 2022.

But, sources say that further, significant triple-A tightening is unlikely in the immediate future. They point to the glut of supply which will likely halt tightening for the time being, as it is not just new issues in the pipeline, but also a significant amount of resets which is causing market fatigue.

OHA 17 also shows another interesting trend appearing in the US CLO market: the increase in the number of split triple-B tranches. Of the 10 new issues last week, six of them had split triple-Bs into senior and junior components and four of those had the junior triple-B in fixed form.

These fixed-rate junior triple-B tranches are driven by investor demand, with one source stating that it is coming from an insurance account, but not a “core, traditional account”.

Bain 2024-1, Ocean Trails XV, Rad 23 and Trinitas XXIV all had junior, fixed-rate triple-B tranches and OHA 17 and TCW 2024-1 had junior triple-Bs but in floating form.

Fixed-rate tranches in general are becoming more common too. Only two new issue US CLOs last week did not include a fixed-rate tranche of any rating – Elmwood 25 and CarVal IX-C. 

The fixed-rate tranches that price pari passu to a floating-rate tranche are actually pricing through their floating-rate counterparts due to the demand for them. For example, on OHA 17, there is a floating-rate double-A tranche that pays 190bps and a fixed-rate double-A tranche that pays 5.613%. 

However, that coupon equated to a floating-rate discount margin comes to 185bps, 5bps inside the floating-rate tranche.

KKR 28 was the highlight among resets as KKR priced the first three-year reinvestment, one-year call-lock CLO of the year. KKR priced the triple-As at 144bps, 4bps inside Oak Hill’s market-leading 5/2 print, to give indication on the term curve. Sources say that a 3/1 new issue US CLO from a similarly tiered manager should come in slightly tighter as resets often pay a small premium on the triple-As.

This makes it all the more impressive that the five-year reset of Elmwood 20 priced triple-As at 150bps. The manager priced a new issue (Elmwood 25) and a reset last week, with its new issue triple-As coming in at 153bps. The double-B tranche was retained on Elmwood 25, but on the reset of Elmwood 20, the tranche priced at 600bps. This makes its triple-A to double-B basis just 450bps.

Sycamore Tree and Redding Ridge Asset Management priced the other two resets last week. Sycamore Tree’s triple-As printed at 168bps and Redding Ridge’s at 155bps and both are five-year reinvestment resets.

The middle-market CLO space saw three new issues last week and three different structures. Brightwood Capitalkicked off the week with a static transaction that only had a triple-A tranche, which printed at 230bps. BMO arranged the CLO for its first middle-market arranging credit since 2021.

PennantPark also priced its triple-As at 230bps but on a four-year reinvestment CLO. PennantPark VIII priced with debt down to triple-B rating, which is the manager’s preferred style as five of its last six new issue middle-market CLOs have been structured along these lines.

Fortress Investment Group went one step further and priced its new issue CLO with debt down to double-B. Out of 61 new issue middle-market CLOs that priced last year, 27 had double-B tranches compared to 14 out of 32 in 2022. There have been five new issues this year, of which two have had double-B tranches.

Sources say that the double-B tranche demand is driven by a combination of increased demand in the middle-market space and also an increase in the number of borrowers using the private credit/direct lending scene.

Fortress priced its senior triple-A tranche at 220bps. A four-year reinvestment, two-year non-call new issue middle-market CLO has not priced at 220bps or tighter since October 2022, according to 9fin data.

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