February 13, 2017 - After being dominated by refinancings in January, the CLO engine is firing on all cylinders in February. Following less than $1 billion of issuance in January, new CLO formation topped $3.2 billion in the first two weeks of February, according to LCD numbers. February refis, meanwhile, topped $5 billion through February 9th. And the pipeline is full, Asset-Backed Alert wrote, with at least nine new offerings in the calendar. While falling loan spreads are making the arbitrage challenging for old and new CLOs alike, at least the new CLOs also are enjoying narrowing liability spreads. The average spread on the February’s BSL CLO AAAs was LIB+135, as compared to more than LIB+150 in 2016, according to TR-LPC’s Leveraged Loan Monthly.
Folks also are casting an eye to any regulatory fixes which might make CLO formation – and hence availability of credit to U.S. borrowers – easier. In reality, any legislative fix will likely take a while, as noted by the WSJ, American Banker and the LSTA (here and here). And so, as TR-LPC reported, the CLO market continues to comply with Dodd-Frank following President Trump’s Executive Order. But that doesn’t mean CLO documentation cannot consider the possibility of a risk retention repeal. A Bloomberg Terminal article notes that Och-Ziff’s recent CLO refinancing documents stated that there would be no further refinancings “unless there is a change in law that permits such refinancing without resulting in non-compliance with the credit risk retention requirements under the Dodd-Frank Act”. The Och-Ziff CLO was refinanced under the terms of the Crescent No Action Relief letter, which permits CLOs issued prior to Dec. 24, 2014 to refinance once after Dec. 24, 2016 without requiring risk retention.
While the market is focused on risk retention repeal via legislation, there are other efforts underway. For instance, the LSTA is moving forward with the appeal of its risk retention lawsuit.