CLO deals grow significantly in first half of 2014

The total value of U.S.-based collateralized loan obligations in the first six months of this year increased by US$22 billion over the total for the second half of 2013, according to law and fiduciary firm Appleby.

Collateralized loan obligations securitize assets, typically leveraged loans, by pooling them together and paying out the income and principal payments from the pool to investors. Unlike mutual funds investors, who all take the same risk, CLO investors buy tranches of a transaction with specific seniority and payout structures and thus different degrees of risk.

CLOs have made a comeback after the financial crisis as they offer investors the opportunity to access leveraged loans at comparatively attractive yields with the added benefit of diversification and the ability to select customized risk profiles.

The 119 deals priced in the first half of 2013 represented a total value of US$63.2 billion, signaling that the market is thriving, Appleby said. The vast majority of deals are structured in the Cayman Islands.

“The first half of 2014 not only marked the biggest dollar amount in terms of CLOs priced since the market started picking up in 2010, but the average deal size is well above previous six month periods in recent years,” said Julian Black, Cayman-based partner and global head of Structured Finance 
at Appleby.

“Investors continue to recognize that CLOs are unlike ABS CDOs in that they are diversified, have strong performance history and a reassuring level of transparency and oversight by third parties,” he added.

Appleby’s latest CLO Insider report shows that at US$531 million, the average deal size was 14 percent higher compared to the second half of 2013 and up 12 percent when compared to the average of the full year 2013.

Meanwhile, total value of CLOs priced in the first half of the year was 53 percent higher than in the final six months of last year. Appleby expects that trend to continue.

“We see robust issuance for CLOs going forward; the market is flourishing and our pipeline is well-fueled to the end of 2014 and beyond,” said George Bashforth, head of Directorship Services, Appleby Trust (Cayman) Ltd. “Our CLO forecast remains strong, and we expect the full year to round-out at between the US$100 to US$120 billion range.”

Last year there were 182 CLO deals for a total value of $86 billion, surpassing the total issuance for 2012 by $35 billion.

The report found that a core set of arrangers continue to dominate the CLO market, with Citigroup taking the top position again for the six-month period, closing 18 deals valued at US$9 billion. The top 10 arrangers account for 86 percent of the total for CLOs priced during the period.

The top 10 managers for the first half of 2014 have closed 18 percent of the total of 119 CLOs priced. Of the 119, 87 individual managers have participated, of which 58 have issued one deal, 26 issued two deals and three issued three deals, the report says. Appleby also notes that a number of the big private equity houses have done their debut deal during the period.

The average AAA spread for deals, the tranche with the lowest risk which gets paid out first and therefore also offers the lowest yields, was 149bps over LIBOR in the first half of 2014, compared to 143bps for the previous period.

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