Advertisement
Canada markets closed

  • S&P/TSX

    22,059.03
    -184.99 (-0.83%)
     

  • S&P 500

    5,567.19
    +30.17 (+0.54%)
     

  • DOW

    39,375.87
    +67.87 (+0.17%)
     

  • CAD/USD

    0.7332
    -0.0015 (-0.20%)
     

  • CRUDE OIL

    83.44
    -0.44 (-0.52%)
     

  • Bitcoin CAD

    77,102.91
    +2,654.96 (+3.57%)
     

  • CMC Crypto 200

    1,171.10
    -37.59 (-3.11%)
     

  • GOLD FUTURES

    2,399.80
    +30.40 (+1.28%)
     

  • RUSSELL 2000

    2,026.73
    -9.90 (-0.49%)
     

  • 10-Yr Bond

    4.2720
    -0.0830 (-1.91%)
     

  • NASDAQ

    18,352.76
    +164.46 (+0.90%)
     

  • VOLATILITY

    12.48
    +0.22 (+1.79%)
     

  • FTSE

    8,203.93
    -37.33 (-0.45%)
     

  • NIKKEI 225

    40,912.37
    -1.28 (-0.00%)
     

  • CAD/EUR

    0.6762
    -0.0030 (-0.44%)
     

Analysts weigh effects of SVB on CLOs, loan demand

Pitchbook
·5 min read

Five US CLO transactions priced last week, as market participants made early assessments about what kind of impact the failure of Silicon Valley Bank will have in the CLO industry. In Europe, a significantly stronger-than-expected start for CLO issuance during the first two months of the year likely means the market could be set for a bit of a breather.

Year-to-date CLO issuance as of March 13:

  • US: $26.27 billion from 61 transactions, compared to $23.61 billion from 47 deals at this point last year.

  • Europe: €5.91 billion from 16 deals, compared to €6.44 billion from 15 deals at this point last year.

  • Global: $32.57 billion from 77 deals, compared to $30.88 billion from 62 deals at this point last year.

US: Liquidity in focus
The five US CLO pricings totaling $2.13 billion in the March 7-13 period bring month-to-date issuance to $3.66 billion across nine transactions, as CLO primary deal-making continues to run slightly ahead of the pace in 2022. Triple-A BSL CLO spreads also were steady, ranging from 180 to 220 bps over term Sofr last week.

ADVERTISEMENT

Two of last week’s deals were middle market transactions, bringing year-to-date issuance in that market segment to $4.79 billion, per LCD data.

After the SVB failure on March 10, concerns were raised about the lending capacity available to middle market companies prior to the federal government’s emergency lending facility established during the weekend.

But by Monday, analysis was concentrated on whether the second-largest US bank failure in history would spawn a contagion of funding and liquidity problems for banks — and how that might impact the $191 billion of US CLO bonds mostly in held-to-maturity portfolios.

Deutsche Bank on March 14 said the SVB collapse “has fueled fresh concerns about the financial stability of other regional and specialty lenders.”

“What may be the impact of this on the CLO market?” the firm asked. “For one, CLO pricing is set to move wider, a trend that has been noticeable in [the] secondary over the last few weeks” and will likely migrate into the primary market in response to the “broader reversal" in investor sentiment.

Liquidity may became an “overarching concern” for institutional investors in the near-term, Deutsche added. And although tech sector exposure averaging more than 11% in CLOs is elevated compared to other sectors, Deutsche Bank noted that SVB catered more to riskier, venture capital-backed firms “and losses to the broader sector should be limited.”

BofA Securities on March 10 said CLO AAA paper “could solve part of the problem” in banks’ valuation concerns in the wake of SVB's failure, stemming from a history of stable pricing values during other recent macroeconomic events, such as Covid and inflation.

“The increase in Fed Funds to 4.75% without a corresponding pick up in yield in their securities portfolio is one of the factors behind the [month-to-month] losses in Bank books,” plus constraints in net interest margins, the report noted. CLO AAAs in the current high spread environment (185-200 bps over Sofr for new issue AAA spreads) could present “relative price stability” as part of an institution’s holdings as well as a cushion to bank losses.

New issues
RBC Capital Markets on March 13 priced the $401.75 million Elmwood CLO 23, with deal terms featuring a coupon of 180 bps over term Sofr for the $252 million Class A tranche with expected AAA ratings from S&P Global Ratings. Elmwood CLO 23 is the second CLO this year for collateral manager Elmwood Asset Management LLC and the deal includes a standard two-year non-call/five-year reinvestment period structure.

Also on March 13, Goldman Sachs priced the $503.9 million Wind River 2023-1, another 2/5 deal and the first CLO issuance this year for First Eagle Alternative Credit LLC. Terms include a primary triple-A tranche coupon of 185 bps over term Sofr.

Goldman on March 10 priced the $401 million Sycamore Tree CLO 2023-3 transaction managed by Sycamore Tree CLO Advisors LP, with a primary triple-A coupon of Sofr+220 bps. This CLO is a short-dated vehicle with only a one-year non-call period ending in April 2024 and three-year reinvestment window running through April 2026. The deal marks the third overall issuance from Sycamore Tree Capital Partners’ CLO platform since its 2021 launch.

Societe Generale and transaction co-manager Citizens Capital Markets Inc. on March 8 priced the $529.8 million ABPCI Direct Lending Fund CLO XII, a middle market CLO issued by AB Private Credit Investors LLC. Terms include a triple-A spread of 255 bps over Sofr for two Class A tranches of notes and loans. The deal, expected to close March 30, features a two-year non-call ending in April 2025 and a four-year reinvestment period through April 2027.

And also on March 8, LCD confirmed the pricing of the $297.8 million PennantPark CLO VI, a middle market vehicle (with a two-year non-call and four-year reinvestment period) managed by an affiliate of PennantPark Investment Advisers LLC. Terms for PennantPark’s first 2023 CLO transaction include a triple-A spread of 268 bps over term Sofr.

Featured image by jamesteohart/Shutterstock



This article originally appeared on PitchBook News