12/21/2012

CLO Market Pulling More Triple-A Buyers

The market for triple-A-rated collateralized loan obligation securities is suddenly more crowded.

In just the past couple of weeks, a half dozen asset managers and regional banks have joined a small field of investment banks and insurance companies that until now have been among the few buyers of senior CLO paper — even as issuance has exploded this year. The new entrants include PNC Bank and investment firms Cutwater Asset Management and DoubleLine Capital.

The added buying power bodes well for issuers beset by a dearth of triple-A buyers. Until this month, the market for senior paper has included just 10 “anchor” investors and maybe a dozen smaller players. While that’s been enough to absorb a surge in CLO issuance over the past six months, issuers have been frustrated that spreads haven’t tightened further.

“The challenge all year has been finding the triple-A [buyers]. J.P. Morgan was big, but then they shut it down,” one source said, referring to a span of several months in which the bank pulled back from the market and then jumped back in. “Then the Japanese banks picked up the slack. But now, some real new money has been coming in.”

On Nov. 16, DoubleLine filed a prospectus with the SEC for a bank-loan mutual fund called DoubleLine Fixed Rate Fund that counts CLOs among its investment targets. The Los Angeles firm has more than $50 billion under management, much of it in structured products.

Cutwater, an Armonk, N.Y., firm that manages $30 billion, already was active as a buyer of mezzanine CLO paper. But there are signs that it now plans to begin investing in senior notes as well.

As previously reported, Pimco also has begun buying triple-A notes.

With more investors in the market, the pattern of buying is starting to shift. Until recently, it was common for an anchor investor to take down the entire triple-A-rated portion of a deal. Now, the senior tranches are more likely to be divvied up among several buyers.

“They won’t do the whole triple-A tranche,” one dealer said of the banks and asset managers that have recently entered the field. “But they are doing $50 million to $100 million. At least four of them have emerged in the last two weeks.”

So far, there are no signs that the new money is causing spreads to tighten. Among deals that have priced in the past week or so, the average spread for five-year triple-A-rated notes remained at recent levels of 138 bp over three-month Libor. That’s down from about 150 bp three months ago.

“There is just so much in the queue that you needed a few more investors just to get the deals done,” another source said. “You would have had a supply-and-demand problem. So getting in new buyers is a positive, but we have not seen such rampant activity that it has tipped and triple-A spreads have tightened.”

Indeed, he cautioned that if spreads do narrow, some investors may pull back. “The current valuation of CLO paper looks pretty attractive,” he said. “Those buyers will fall out if the spreads tighten too much. They are opportunistic. They like the spreads today.”

So far this year, CLO issuers in the U.S. have sold $54 billion of notes via 119 deals, versus just $13.6 billion via 32 deals in 2011, according to Asset-Backed Alert’s ABS Database.

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