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Euro CLOs touch new lows as French insurance bid deepens
October 13, 2016 / 2:17 PM / a year ago

Euro CLOs touch new lows as French insurance bid deepens

LONDON, Oct 13 (IFR) - A deepening bid from big-ticket buyers in Europe, Japan and the US has driven European senior CLO spreads to a fresh low of 110bp, with some managers eyeing even tighter prints.

Tikehau Capital Europe has tightened the talk on its seniors to 110bp over three-month Euribor, from 114bp area previously, according to two sources.

The level is tighter than where three other deals printed just two weeks ago. Oaktree and PineBridge sold their Triple As at 114bp in late September, while Blackstone’s GSO cleared its notes at 115bp.

The Tikehau levels also mark a fresh low for the market, with the tightest senior spread on a European CLO since the financial crisis.

And the European market could grind even tighter, with several sources expecting KKR Credit Advisors to print at even more narrow spreads. One said the manager could tighten the Triple As as far as 105bp on its most recent Avoca trade.

Market participants chalked up the tightening to a recent increase in appetite from French insurance groups, with the investment arm of AXA at the helm of the demand surge, three people said.

AXA did not immediately respond to a request for comment.

Investors noted the asset class has become particularly attractive recently, as negative interest rates have squeezed returns in other parts of European structured credit.

“You can’t forget that those notes have Euribor floors,” said one investor. “It looks more like 140bp when you take that into account. If you’re looking for Triple As in Europe, it’s probably the cheapest thing you can buy.”

CLO notes have Euribor floors of zero, offering a pick-up on asset classes that are priced over the current negative Euribor benchmark.

The uptick in buying from AXA and other insurance behemoths has only deepened a fierce bid for paper in the asset class, which this year has attracted much attention and cash from the likes of Norinchukin, BTMU and JP Morgan’s Chief Investment Office.

“There’s three or four accounts that are chasing the market down to compete with the Japanese,” said one CLO manager. “It seems like it’s a race to the bottom.”

However, market sources noted that demand for mezzanine risk is still somewhat lacklustre, as investors remain wary of the slim supply in the leveraged loan market which could hit their returns if managers fail to ramp up their deals on schedule.

Sources said that, in a bid to lock in cheap senior financing, some managers are coming to market with warehouses that are largely empty of assets.

BlackRock, for instance, had just 50m in loans in its warehouse in early September, when it began marketing its second European CLO, according to one source. The group was targeting a 400m size for its vehicle.

In a bid to mediate execution risk, investors have been demanding wider levels further down the capital stack.

The Single Bs on Tikehau’s trade were being marketed at 950bp area, in line with other recent deals, according to sources. A year ago, managers were clearing similar tranches at 870bp.

Tikehau’s second European trade, which is being arranged by Citigroup, is expected to price as early as Thursday.

KKR’s trade, meanwhile, is targeting pricing by the end of this week via Morgan Stanley, with tranches A through D subject as of Thursday morning.

BlackRock, which was targeting pricing for mid-October, is expected to come next week via Citigroup. (Reporting by Mariana Ionova, editing by Robert Smith and Alex Chambers)

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