RLPC: CLO pipeline tops $6B in first week of 2013

NEW YORK Wed Jan 9, 2013 2:38pm EST

NEW YORK Jan 9 (Reuters) - The CLO pipeline built steam quickly the first full week back after the New Year, with about $6 billion in vehicles already being marketed, sources told Thomson Reuters LPC.

The foreseeable supply comes after CLO issuance staged a dramatic comeback in 2012. Surpassing all expectations, total CLO issuance climbed above $54 billion last year with 70 different managers pricing 122 transactions in all, according to Thomson Reuters LPC data.

Today's visible pipeline is split among 13 managers, with Och-Ziff, LCM Asset Management, Symphony Asset Management, Western Asset Management all said to be marketing deals sized at $500 million or more.

Given this week's forward calendar, expectations are currently running high for issuance in the coming months, with market players now saying that as many as 35 deals could price between January and February. If true, 1Q13 issuance could surpass the nearly $23 billion seen in 4Q12.

"Although we believe total issuance in 2013 may not keep pace with the fourth quarter of last year, as that would project to eclipse $90 billion, issuance in the first quarter of this year may meet or even exceed 4Q's total of $22.6 billion as seemingly insatiable demand for yield fuels the new issue market," said Kenneth Kroszner, structured credit analyst at RBS.

Many managers are said to be under pressure to issue new vehicles to replace legacy deals running past reinvestment periods and facing amortizations that reduce management fees. According to JP Morgan, the amount of CLOs exiting reinvestment will peak next year at almost $80 billion.

For now, CLO managers are taking advantage of lower liability costs after spreads tightened in 2012.

Beginning the year at around 150bp, average AAA spreads tightened to a 2012 low of around 132bp in May before widening slightly to sit at around 140bp by year-end, according to RBS.

Lower down the capital stack, spreads ended the year at their tights, with AA notes ending the year at around 225bp after beginning the year at around 325bp and BBB notes ending the year at around 500bp, down from 625bp to start the year. But those levels are already being tested in 2013.

Earlier this week, Columbia Management Investment Advisors outlined pricing guidance on a new $413 million CLO being marketing with spreads noticeably tighter than where liabilities were printing at year-end. The $262 million AAA notes are talked in the 135bp area, sources said, about 5bp tight of similarly rated tranches in December. The BB notes are talked in the 650-675bp range, 50-75bp tight of where similar notes were printing last month.

Although it might be getting easier to issue a CLO, managers are expressing concerns over how easy it will be to source the underlying collateral. Despite the $341 billion in institutional loan issuance in 2012, only $148 billion of that was new-money. The rest were the result of refinancing.

With CLOs already sitting on about $12 billion in uninvested cash at the end of 2012, according to Thomson Reuters LPC Collateral, and U.S. cumulative reinvestment capacity expected to reach $105 billion in 2013, according to JP Morgan, sourcing the underlying collateral might provide a headwind for CLO issuance.

Still, managers are lining up to issue new CLOs. One manager that priced a deal in the fourth quarter of last year and is now looking to launch more vehicles in 2013 was informed recently by one arranger that there are already about six months worth of deals in the pipeline.

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