February 6, 2017 - January began where December left off – with a full-fledged technical imbalance leading to rapid-fire repricings, a dividend recap binge and rapidly compressing primary spreads. Of course, December and January weren’t identical. First, the sources of demand were very different and, second, as discussed in the Secondary Review, the secondary market eased the throttle on its rapid run-up.
The investor base flipped in January. After $10 billion and $7 billion of CLO issuance in November and December, respectively, January volume shriveled to two deals and less than $1 billion. (But it’s not a drought: The first week of February saw four CLOs price for a total of $2.7, according to LCD.) Instead of closing new deals in January, CLO managers continued their refinancing binge. In 4Q16, more than $15 billion of resets and $16 billion of refis were completed, as the market raced to get deals done before risk retention went live. But risk retention didn’t stop the entire refi train: According to TR-LPC, January saw $7.7 billion of CLO refinancings. The magic here is that January’s refinancers were 2014 CLOs that could use the Crescent No-Action Relief letter to refinance (once) without forcing the manager to retain risk.
As CLO issuance downshifted in January, loan mutual funds’ impact upshifted. Following $6.8 billion of inflows in December, loan mutual funds enjoyed another $4 billion-plus of positive flows last month. This demand swamped the market. And so, the trends of fourth quarter – contracting spreads, repricings and dividend recaps – accelerated into January. The truly awe-inspiring (if not awesome) number was repricings: A cool $100 billion of loans repriced in January, a monthly record, as the LSTA Chart of the Week indicates. And companies weren’t trimming a basis point here or there; LCD wrote that the average spread reduction was 84 bps. This means that January’s repricing spree reduced annual interest payments by $840 million. (It may be worth observing that one of the repricers was UFC. Recall that last year banks were chastised for underwriting the UFC loan because the banking regulators deemed it a “non-pass” credit. Come forward to January and – regulatory opprobrium notwithstanding – the market decided the UFC loan was good enough to reprice. However, as it was a non-pass credit, banks presumably could not lead a repricing. In turn, KKR did the repricing on its own.)
January also saw extreme reverse flexing, TR-LPC noted; they tracked 39 reverse flexes and just one upward flex. The resulting impact on spreads and yields wasn’t pretty. According to LCD, the average B+/B all-in spread was LIB+376, down 30 bps in a month, and the lowest level since 2007. Up the rating spectrum, BB/Ba2/BB+ Calpine reverse flexed to LIB+175, also a level that hasn’t seen much play since 2007. But wait, there’s more. TR-LPC published a chart suggesting that new issue loan yields have fallen to 2004 levels. But all good (or bad) things must come to an end. LevFinInsights noted that there are stirrings of resistance to the repricing wave. Bids have come down from the break levels on loans that allocated earlier this month, accounts increasingly are dropping from some repricings, several companies walked back their repricing levels and one company pulled its repricing altogether.