| NEW YORK
NEW YORK Feb 3 (Reuters LPC) - Octagon Credit Investors
issued a new Collateralized Loan Obligation (CLO) with one of
the lowest senior spreads seen on a US fund in more than three
years as liability costs move lower to counter a repricing wave
in the US leveraged loan market and keep CLO issuance on track.
The New York-based manager's US$611.5m CLO includes a
US$390m Triple A slice that pays investors 132bp plus Libor,
sources said, one of the lowest Triple A spreads since the third
quarter of 2013, when some senior tranches priced at 130bp or
lower, according to Thomson Reuters LPC Collateral data.
Spreads have tightened significantly since January 19, when
MJX Asset Management raised the first 2017 CLO with a Triple A
slice that pays lenders a coupon of 145bp, sources said, and are
expected to tighten even more this year.
"I don't think we get through the post-crisis tights, but I
would expect tighter Triple A spreads than we have seen the last
two years," said Brad Rogoff, head of credit strategy at
CLO funds, the biggest buyers of leveraged loans, pool loans
of different credit quality and sell slices of the deal of
varying seniority, from Triple A to B. Their returns are being
squeezed as borrowers take advantage of strong investor demand
and reprice leveraged loans before expected Federal Reserve
interest rate hikes.
More than US$65bn of loans were repriced in January as funds
saw more than US$4.1bn of inflows into the asset class during
the month, according to Lipper data.
Reducing Triple A spreads makes it easier for CLOs to
accommodate lower loan yields. It also limits the hit to CLO
junior equity holders' returns, which would make it harder to
issue new CLOs. Banks are expecting a drop in CLO issuance in
2017 to US$50-70bn, down from US$72.4bn last year.
"If you look at loan repricings, they have been substantial,
so you need even more tightening in Triple As in order to see
more CLO issuance," Rogoff said.
Triple A Spreads
CLO Triple A spreads finished 2016 at 141bp from as wide as
161bp in June, according to Morgan Stanley data. Before the
credit crisis, spreads on the senior slice were as low as 23bp.
Regulatory changes have hit CLO buyers and kept Triple A
spreads high for the last few years, Rogoff said. These include
the Dodd-Frank Volcker Rule, which prohibits banks from
purchasing the debt of CLOs that own bonds and a Federal Deposit
Insurance Corp rule, which forced some institutions to pay a
higher premium to hold CLO debt.
Although CLO Triple A spreads are falling, the funds still
offer a better yield than other similarly rated products. CLO
Triple A spreads in the 130bp range compare with similarly rated
five-year non-agency commercial mortgage-backed securities at
49bp on January 30, according to Wells Fargo data.
THL Credit Advisors raised a US$612m CLO with Morgan Stanley
February 2 that includes a US$390m Triple A slice that pays
134bp plus Libor, sources said. Sound Point Capital Management
raised a US$664.3m CLO with MUFG on the same day that includes a
US$416m Triple A slice paying 139bp.
(Reporting by Kristen Haunss; Editing by Tessa Walsh and