CSAM CLO sets new AAA COVID-era benchmark

Collateralized loan obligation pricing was mixed last week, with AAAs ranging from LIBOR plus 165 basis points to 205 basis points. The top tier repeat issuer, Credit Suisse Asset Management, priced its AAAs at the tightest level since the pandemic. In addition to CSAM, Western Asset Management Company and Benefit Street Partners priced deals. According to JPMorgan, the CLO carry trade is moving toward tightening to AAAs to 150 bps and BBBs at 450 bps by year-end. CLOs have retraced 60% to 83% of COVID-related widening. For 2020 net CLO supply of $25 billion is expected, a four-year low compared to $21 billion in 2008. Negative net supply is expected for the year in securitized products overall in 2020. Nonetheless, CLOs, agency MBS, ABS, AAA/BBB CMBS remain cheap to corporates and most investment banks are bullish, but expect waves of volatility. It's unclear if CLO deterioration has peaked. JPM's high-frequency loan ratings tracker indicates a long-term maturity (LTM) upgrade/downgrade ratio of 0.17, the weakest ever. Based on the data reported as of June 17 for 1,069 U.S. CLOs, average weighted average rating factor (WARF) continues to increase, 31% are failing the reinvestment overcollateralization (OC) test, and 20% the junior-most OC test. The failing CLO OC tests indicate cashflow diversions in July unless corrected. The greater U.S. CLO tail risk is resulting in a greater erosion of value in US loan portfolios, as some managers have sold assets at significant losses in an attempt to stave off interest diversions, said a CLO investor. CLOs have different triggers in place designed to protect bondholders from erosion in loan portfolio value, starting from the higher rated tranches at the top of the capital structure. A breach in the trigger causes the interest cash flows of the lower tranches (starting with equity) to be diverted to amortize the deal, and the increase in CCC rated assets and defaults has led to a number of deals breaching their limits. The U.S. CLO secondary market activity went up to $2 billion in offered securities last week, according to securitization data provider Empirasign. However, possibly for the first time since the COVID crash, buyers pushed back on skyrocketing prices. Over 40% of CLO bid wanted in competition (BWIC) offers did not trade (DNT) last week, compared to a 25% DNT average the prior week. CLOs have been retracing in value since the pandemic started in March, with robust buying from CLO equity firms, insurance companies to distressed credit funds. The mezzanine CLO BB to As have bolted up by 30-points area for several investors. Some investors have pulled back on bidding-up mezzanine CLOs, as seen last week. "Absolute spread levels do not reflect the increased tail risk in CLO portfolios and lower OC ratios due to excess CCC and higher defaults," said BofA's CLO Weekly.

CSAM CLO sets new AAA COVID-era benchmark

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