applebyglobal.com CONTENTS/ EXECUTIVE SUMMARY [ 2] MARKET OVERVIEW [ 3] ALL CLO DEALS TABLE H1 2014 [ 6, 7] SPREADS ON AAAS [ 8] TOP MANAGERS & ARRANGERS [ 9] FOCUS ON EUROPE [ 10] OUTLOOK [ 11] /INSIGHT INTO THE GLOBAL CLO MARKET/ JANUARY - JUNE 2014 CLO INSIDER
The latest Appleby report which provides data, insight and analysis on the global Collateralised Loan Obligation (CLO) market. This CLO report principally focuses on the US CLO deals data issued during the first six months of 2014, and reflects how this compares and contrasts with the same data extracted for previous periods.
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CONTENTS/EXECUTIVE SUMMARY [2] MARKET OVERVIEW [3] ALL CLO DEALS TABLE H1 2014 [6,7]SPREADS ON AAAS [8] TOP MANAGERS & ARRANGERS [9]FOCUS ON EUROPE [10]OUTLOOK [11]
/INSIGHT INTO THE GLOBAL CLO MARKET/
JANUARY - JUNE 2014CLO INSIDER
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2010 H1
196397
AVERAGEAAA SPREAD
AVERAGEDEAL VALUE
4
1,586
2010 H2
188400
4
1,600
2011 H1
132480
12
5,761
2011 H2
157425
17
7,229
2012 H1
147422
39
16,466
2012 H2
150462
36,037
78
TOTAL DEALS
TOTAL VALUE (US$m)36,037
78
2013 H1
124481
47,611
99
2014 H1
1495312013 H2
143465
41,356
89
63,246
119
EXECUTIVE SUMMARY
Welcome to our latest Appleby report which provides data, insight and analysis on the global Collateralised Loan
Obligation (CLO) market.
This CLO report principally focuses on US CLO deal activity during the first six months of 2014, and reflects how this compares and contrasts with previous periods. 119 deals priced during the period, with issuance pushing well ahead of even last year’s busy first half.
There are a number of key themes that emerge from the statistics:
■ There was USD63.2bn of issuance in the first six months of 2014, surpassing the previous half year period by USD22bn.
■ Average deal size was USD531m, an increase of 14% over the second half of 2013, and 12% more than the full year average for 2013 (USD473m).
■ The top ten deals by value for the first half of the year represented 15% of the value for all deals for the period. Average deal size for this group was USD927m.
■ The average AAA spread for deals closed between January and June 2014 was 149bps, compared to 143bps for the previous period.
■ A core set of Arrangers continue to dominate the CLO market, with Citigroup leading the ranking for the six month period, closing 18 deals valued at USD9bn.
We do hope that you find our analysis on the following pages useful. Certainly we continue to see robust issuance for CLOs going forward; the market is flourishing and the Appleby pipeline is well fuelled through to 2015.
George BashforthHead of Directorship Services Appleby Trust (Cayman) Ltd.
Julian BlackPartner Global Head of Structured Finance, Appleby
2010 H1
196397
AVERAGEAAA SPREAD
AVERAGEDEAL VALUE
4
1,586
2010 H2
188400
4
1,600
2011 H1
132480
12
5,761
2011 H2
157425
17
7,229
2012 H1
147422
39
16,466
2012 H2
150462
36,037
78
TOTAL DEALS
TOTAL VALUE (US$m)36,037
78
2013 H1
124481
47,611
99
2014 H1
1495312013 H2
143465
41,356
89
63,246
119
US CLO MARKET BY VALUE (US$M) 2010-2014
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VOLUME OF ALL CLO DEALS BY HALF YEAR 2010-2014
2014 got off to a strong start for new US CLO issuance, and European CLO activity is also doing well on a relative basis. For the remainder of 2014 we expect new issue CLO activity to remain robust with a continued diversification across the Managers.
A total of 119 CLO deals priced in between January and June 2014, compared to 89 in the preceding six months. This figure reveals a flourishing market in terms of the volume of deals priced, with the month of June showing significant issuance levels in the US. It will be interesting to see if there is any tail off over the summer period, but certainly Appleby’s pipeline is well fuelled through to the end of 2014 and beyond.
Investors continue to recognise that CLOs are unlike ABS CDOs in that they are diversified, have strong performance history and a reassuring level of transparency and oversight. If the current rate continues for the next six month period, there would be USD126bn issued across the full year. This would exceed recent forecasts by Wells Fargo (USD80bn) and J.P. Morgan (USD100bn).(1)
MARKET OVERVIEW
VOLCKER RULE
The Volcker Rule, included in the Dodd-Frank Act, prohibits banks from proprietary trading and restricts investment in hedge funds and private equity by commercial banks and their affiliates. Specifically, in relation to CLOs, it doesn’t permit banks to own positions in CLOs that hold bonds, and it comes into force in July 2017.
After coming to a near-standstill for a short period when the final version of the Volcker Rule was released in mid-December 2013, the primary CLO market has picked up pace again in 2014. The latest indication is that the FederalReserve is to allow banks an additional two years to complywith Volcker Rule standards for treatment of CLOs. This move minimises the impact of the rule for 1.0 CLOs, as the vast majority of the current USD135bn CLO 1.0 universe is expected to have amortized or been repaid by then. However, banks holding CLO 2.0 deals will still need to comply with the Rule.
US CLO 2.0s issued during 2014 have generally been structured as Volcker compliant. But there is some restructuring required around the pre-2014 CLO 2.0’s and this process has got underway. The most viable Volcker solution for this batch of CLOs is around amendments to exclude bond buckets from the deals, and these changes are well underway.
4 4 12 17
39
78
99 89
119
2010 H1
2010 H2
2011 H1
2011 H2
2012 H1
2012 H2
2013 H1
2013 H2
2014 H1
No. of Deals
(1) As reported in Asset Securitization Report (2 April 2014) and the Financial Times, (18 May 2014) respectively.
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“ …if this level of investment continues… we could see overall issuance increasing by around 42% over issuance in 2013.”
RISK RETENTION
The timing of the emergence of Volcker has pushed the proposed US Risk Retention Rules to one side for the time being, but the question could re-emerge at any time. The proposed rules, which are part of broader Dodd-Frank banking legislation, would require CLO Managers to hold capital equal to five percent of each CLO issued, either held as a vertical slice across the full capital stack, or as a horizontal equity slice. During the review period a number of agencies, including the US Chamber of Commerce, have publicly expressed how damaging to the CLO market the proposed changes would be. Due to the potentially large capital requirements needed, a number of smaller Managers could be squeezed out from the market, hampering the future formation of CLOs, and consequently raising financing costs for businesses. According to a study commissioned by the Loan Syndications and Trading Association that was conducted by Oliver Wyman(2), CLO market contraction could raise financing margins for businesses by more than one-third, thereby increasing aggregate annual interest costs by approximately USD3.2 billion.
MARKET OVERVIEW CONT’D
TOTAL VALUE OF ALL CLO DEALS BY HALF YEAR 2010-2014
Looking at values, we see a significant increase in total CLO issuance during the period, compared to the previous six months. Between January and June 2014 there was USD63.2bn of issuance, surpassing the total for the previous period by USD22bn. If this level of issuance continues for the second six months of the year we could see overall issuance increasing by around 42% over the issuance in 2013.
DEAL VALUES
(2) ‘Risk Retention for CLOs: A square peg in a round hole?’, Oliver Wyman (Nov 2013)
$1.6 $1.6 $5.8 $7.2
$16.5
$36.0
$47.6 $41.4
$63.2
2010 H1
2010 H2
2011 H1
2011 H2
2012 H1
2012 H2
2013 H1
2013 H2
2014 H1
Deal Value (US$bn)
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Rank Value US$m Pricing date Issuer Manager Arranger
10 770 18 Jun 14 OHA Credit Partners X Oak Hill Morgan Stanley
TOP TEN DEALS BY VALUE (JANUARY-JUNE 2014)
The table below looks at the largest deals priced by value between January and June 2014. The data shows that this group represented 14% of the value for all deals for the period, with average deal size at USD927m, which is significantly more than the average for all deals.
Three deals worth more than USD1bn have been arranged, a deal level only previously reached twice before in the period 2010-2013.
AVERAGE DEAL SIZE 2010-2014
As documented in our previous CLO Insider reports, average deal size for the last two years has been moving steadily upwards and for the first half of 2014 this trend has continued. The data shows an increase of 14% over the second half of 2013, and 12% more than the full year average for 2013 (USD473m). The average deal size for this period (at USD531m) is larger than it has been across the last four years.
Silver Creek CLO 40/86 Advisors Goldman Sachs 362 149
CVP Cascade CLO-2 Credit Value Partners Credit Suisse 520 153
Issuer Manager Arranger Value US$m AAA bps
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SPREADS ON AAAs
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For the first half of 2014, the average US CLO AAA spread was 149 bps (ignoring the relevant discount margin). Looking forward, we expect that liability spreads might contract a little over the coming three to six months, with several investor surveys indicating AAA spread expectations in the L+135-155 range. However, if the issuance levels continue at the current pace this will prevent too much tightening, and any narrowing of spreads would create an easier environment for Managers trying to issue deals. Nonetheless, we see continued robust issuance over the coming months.
Rank AAA bps Pricing Date Issuer Manager Arranger Value
US$m
1 85 05 Jun 14 Ares XXX Ares Deutsche Bank 360
2 100 20 Mar 14 OCP CLO 2014-5 Onex Citigroup 622
3 103 06 Feb 14 OFSI Fund VI OFS Natixis Securities 400
4 115 03 Feb 14 ICG US CLO 2014-1 ICG Citigroup 368
5 117 22 Apr 14 PFP III 2014-1 Deutsche Bank Wells Fargo 524
6 125 17 Jun 14 THL Credit Wind River 2014-2 THL GreensLedge 280
7 127 23 Jun 14 Trinitas CLO II Triumph Capital Nomura Securities 457
9 127 23 May 14 Gallatin CLO VII 2014-1 MP Senior Credit Partners GreensLedge 355
10 135 07 Feb 14 Dryden 31 Senior Loan Fund Prudential Deutsche Bank 621
10 135 11 Mar 14 COA Summit CLO 3i GreensLedge 416
TOP TEN DEALS BY AAA SPREAD (JANUARY-JUNE 2014)
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Rank Arranger Value US$bn
Aggregate # of Deals
1 Citigroup 9.0 18
2 Morgan Stanley 7.8 12
3 BAML 7.6 14
4 J.P. Morgan 5.8 9
5 Wells Fargo 5.4 11
6 Deutsche Bank 5.1 10
7 Credit Suisse 4.6 8
8 Goldman Sachs 3.3 6
9 Jefferies 3.2 8
10 RBS Securities 2.4 3
Total 54.2 101
TOP TEN ARRANGERS BY DEAL VALUE H1 2014
TOP MANAGERS AND ARRANGERS
A core set of Arrangers continue to dominate the CLO market, with Citigroup taking the top position again for the six month period. The top ten arrangers account for 86% of the total for CLOs priced during January-June 2014.
The top ten Managers for the first half of 2014 have closed 18% of the total of 119 CLOs priced. As predicted, we have seen a number of new Managers emerge recently as some of the big private equity houses have done their debut deal during this period, including ICG, TPG and Och-Ziff.
Of the 119 CLOs issued so far in 2014, 87 individual Managers have participated, of which 58 have issued one deal, 26 have issued two deals, and three have issued three deals.
Rank Manager Value US$bn
Aggregate # of Deals
1 CIFC 2.3 3
2 Onex Credit Partners 1.6 2
3 Apollo 1.5 1
4 Och-Ziff 1.4 2
4 Prudential 1.4 2
4 Jefferies 1.4 3
7 Carlyle 1.3 2
7 Invesco 1.3 2
9 Golub 1.3 3
9 LCM Asset Management 1.2 2
Total 14.9 22
TOP TEN MANAGERS BY DEAL VALUE H1 2014
“ The top ten Managers for the first half of 2014 have closed 18 percent of the total of 119 CLOs priced…”
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Pricing
date Issuer Manager Arranger Value EURm AAA bps
24 Jan 14 Jubilee CLO 2014- XI B.V. Alcentra BAML 422 140
24 Feb 14 Carlyle Global Market Strategies Euro CLO 2014-1 CELF Advisors Credit Suisse 375 140
04 Mar 14 Harvest CLO VIII 3i Deutsche Bank 425 154
17 Mar 14 Babson Euro CLO 2014-1 Babson Capital BAML 412 140
27 Mar 14 CVC Cordatus Loan Fund III CVC Goldman Sachs 450 140
27 Mar 14 St Paul's CLO IV ICG Deutsche Bank 435 140
03 Apr 14 Holland Park CLO GSO/Blackstone BNP Paribas 513 140
09 May 14 Avoca CLO XI Avoca Morgan Stanley 516 140
16 May 14 Arbour CLO Oaktree Barclays 371 145
05 Jun 14 Carlyle Global Market Strategies Euro CLO 2014-2 CELF Advisors Citigroup 391 135
06 Jun 14 Harvest CLO IX 3i Credit Suisse 507 135
09 Jun 14 ALME Loan Funding II Apollo J.P. Morgan 382 135
25 Jun 14 Dryden 32 Euro CLO 2014 Pramerica Barclays 416 140
26 Jun 14 Phoenix Park CLO GSO/Blackstone BAML 413 140
FOCUS ON EUROPE
We collate European CLO data separate to the US data. Between January and June 2014, a steady but small volume of deals continue to flow from the European market with stable ratings and strong performance.
In the past six months, 15 European CLOs priced with a total value of EUR6.5bn. Risk retention continues to constrict this market, together with a tighter supply of quality collateral.
EUROPEAN CLO DEALS CLOSED (JANUARY-JUNE 2014)
“ Risk retention continues to constrict this [European CLO] market…”
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Based on the first six months of the year and looking at our own robust pipeline of warehoused CLOs (at over 40 deals), our new issue CLO forecast remains strong and we expect the full year to round-out in the USD100-120bn range.
The market dynamics in some areas may change with more diversification in CLO investors, including additional non-bank AAA investors entering the market such as further pension funds and hedge funds, and some increased demand from insurance companies.
We will be watching further developments in relation to risk retention and the Volcker Rule carefully, for the time being the market continues to perform at a high level.
2014-15 Diary
IMN ABS East 2014: 21-23 September - The Fontainebleau, Miami Creditflux Investor Summit: 14 October - New York Opal Financial Group CLO Summit: 7-9 December - Dana Point, CaliforniaIMN ABS Vegas 2015: 8-11 February 2015 - The Cosmopolitan, Las Vegas
OUTLOOK
“ The market dynamics in some areas may change with more diversification in CLO investors…”
ABOUT APPLEBY
We are one of the world’s largest offshore law and fiduciary services groups. We have offices in all the major offshore jurisdictions.
Our Cayman-based CLO team provides offshore legal, directorship and registered office services to the CLO market. Our clients are amongst the biggest Collateral Managers in the world and they choose Appleby as their Cayman partner for our integrated team, superior service and enhanced relationship management.
For further information contact:
Julian BlackPartner, Global Head of Structured Finance, [email protected]
George BashforthHead of Directorship Services, Appleby Trust (Cayman) [email protected]
RESEARCH METHODOLOGYThis report details Collateralised Loan Obligations (CLO) activity globally in the first half of 2014 using public information from a number of different sources including but not exclusively: LCD, Creditflux, Standard & Poors, Moodys, Fitch and Securitization Intelligence. The date range is 01/01/2014 - 30/06/2014 inclusive. Deal status is as priced within the time period covered. Not all deals are reported immediately, so the figures are subject to change as new information becomes available.