February 23, 2017 / 6:53 PM / 5 months ago

LPC: CLO spreads at lowest level since 2013 a boon for new issuance

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NEW YORK, Feb 23 (Reuters) - US Collateralized Loan Obligation (CLO) debt investors are receiving some of the lowest coupons since 2013, helping to counter a massive loan repricing wave, which should boost the issuance of new funds.

GSO Capital Partners raised a US$611.4m CLO Wednesday that includes a US$384m Triple A slice that pays investors 126bp plus Libor, the tightest spread since September 2013, according to data compiled by Thomson Reuters LPC Collateral. Spreads on the most senior tranche have dropped almost 20bp this year, according to the data.

Lower spreads will help to counter the more than US$155bn of US leveraged loans that have been refinanced this year, and support the issuance of new CLOs, the biggest buyers of the debt. As companies refinance, CLOs receive less interest to pay their own investors, cutting into equity holder distributions. Lowering the spread paid to senior CLO debt investors can increase equity payments, and the better returns can help attract more buyers to the asset class making it easier to sell new funds in the future.

GSO, the credit investment arm of Blackstone Group, raised the Grippen Park CLO with Wells Fargo, according to sources.

A Wells Fargo spokesperson did not return a telephone call seeking comment. A GSO spokesperson declined to comment.

CLOs pool loans of different credit quality and sell slices of the fund of varying seniority, from Triple A to B, to investors such as insurance companies. The fund’s debtholders are paid a set rate plus Libor and the most junior investors, the equity holders, are paid last with whatever interest is left over.

The lower Triple A spreads “will help alleviate the pain from the collateral repricings,” said Maggie Wang, head of US CLO and Collateralized Debt Obligation research at Citigroup.

Despite the most pessimistic forecasts predicting CLO issuance will fall more than 30% this year, 2017 has gotten off to a strong start, buttressed by falling Triple A spreads, with US$7.24bn of CLOs arranged through February 22 compared to US$1.7bn during the same time period in 2016, according to LPC Collateral data.

Fed Rate Hike

Borrowers have been taking advantage of demand for floating-rate loans by cutting their interest payments ahead of expected rate hikes. More than 75% of US leveraged loans issued this year through February 22 were for refinancings, according to LPC data.

The Federal Reserve has twice increased rates since December 2015 and in minutes released Wednesday said it may be appropriate to raise interest rates again “fairly soon.”

Loans, which pay lenders a coupon plus Libor, attract investors when rates are forecast to rise because holders should receive higher yields as rates increase. More than US$6bn has poured into loan mutual funds and exchange-traded funds in the first seven weeks of the year, according to Lipper data.

This demand has led to 19% of outstanding B rated loans being repriced in 2017, with borrowers cutting coupons by an average of 70bp, according to Wang.

The average yield of a B rated loan issued this year was 4.97% compared to 6.99% for similarly rated loans arranged in the first quarter of 2016, according to LPC data. (Reporting by Kristen Haunss; Editing by Michelle Sierra)

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