Bond boom never arrived for resurgent CLO market
* New European CLOs spurn booming high yield
* Managers opt for senior secured wherever possible
* Primary loans still vital collateral supply
By Owen Sanderson
LONDON, Feb 3 (IFR) - The new generation of European CLOs is leaning heavily on the primary loans market, and not making use of new document standards allowing up to 100% bonds, according to Bank of America Merrill Lynch analysts.
When the European CLO market returned just under a year ago, sourcing collateral was seen as one of the biggest obstacles to the recovery. Spreads on good loans had tightened faster than spreads on CLO liabilities, and liquidity in the secondary loan market was thin.
So documents were changed to allow other solutions. Collateral had to be 90% senior secured, but could usually be in loan or bond format, with a limit on fixed rate obligations. Some deals went further, issuing fixed rate tranches to match the larger bond buckets they expected to buy, or sterling tranches to give easier access to the UK market without costly currency hedges.
Investors swallowed these changes because between the two incarnations of the European CLO market - up to 2007 and from 2013 onwards - the European high yield bond market grew up a lot. High yield came to include secured bonds at company level, perhaps even in FRN format, becoming an equal partner to the leveraged loan market rather than being focused on unsecured HoldCo debt for companies with a suspicious distaste for covenants.
A total of 21 CLOs were priced in 2013 for more than EUR7.5bn, and BAML analysed 12 of these. The bank's study shows bonds accounting for 16% of collateral. And even this overstates the case - two Barclays-arranged deals, Pramerica's Dryden XXVII and Carlyle's Carlyle GMS Euro 2013-1 drag the average up, with 45% and 40% bonds respectively.
This is despite a high yield market that outstripped the leveraged loan volumes for the first time in 2013. According to leveraged finance advisory specialists Marlborough Partners, there was EUR70.4bn of high yield in 2013, against EUR67.4bn of leveraged loan issuance.
New issue CLOs have concentrated heavily on the primary market, despite deals such as ICG's St Paul's II, which took collateral from an existing loan fund (holding vehicle for a pre-crisis market value portfolio) and resold it in a cashflow CLO format. BAML's analysis sees around 60% of the collateral it looks at as 2013 vintage.
The problem may be that although high yield is booming, the floating rate market remains small. BAML counts issuance of high yield FRNs at EUR5.5bn in 2013, up from EUR3.5bn in 2012, with EUR350m of FRN bonds in the new CLOs it analyses.
Across both products, however, the preference for senior secured format assets is striking. Most issuers in the new generation of CLOs can have up to 10% of other assets, but many have opted to go 100% senior secured anyway. BAML's analysis shows that seven of the 12 deals it analyses have 100% senior secured collateral, in spite of the higher yields on offer in other products.
They note: "We expect this to change over time as managers make use of their non-senior buckets to varying degrees." (Reporting By Owen Sanderson, editing by Anil Mayre)
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