New CLO deals - structure and pricing

The CLO market kicked off the year to a decent start with about 6 deals that priced so far. The typical structure this year has been similar to this Ares deal (below). Transactions are around $400mm, more than double the deal sizes of the pre-08 period. Pricing has been at LIBOR+150bp for the AAA tranche - as much as 4 to 5 times the pre-crisis levels (pricing got to L+300 or even wider in 2009). Without the monolines to skew the pricing on AAA paper, the bonds are priced for a "natural" investor (as opposed to a combination of a monoline and a CP conduit).

The most important development has been the level of subordination for the AAA. With the rating agencies not wishing to repeat their disastrous CDO mistakes, these new CLO deals have about 37% underneath the AAA tranche. At a 50% recovery on defaulted senior secured corporate loans, over 70% of the portfolio credits would have to default in order to impair the AAA tranche.

Ares CLO (source: LCD)

Another feature of the new CLO deals has been the placement of some of the junior tranches at a discount. In this deal for example the newly minted BBB tranche is placed at 88c on the dollar or L+825 on a yield basis. This allows the manager to match these discounted liabilities to the loan assets, some of which also trade at a discount.

Middle market loan portfolios (loans to mid-sized companies) such as the Golub deal, require some 42% subordination for the AAA and the pricing is LIBOR+200 (50bp higher) because these deals are considered riskier. Middle market deals are particularly important because banks don't always step up to fund middle market corporations that have leverage. CLOs make credit available to some of these firms.

Golub Middle Market CLO  (source: LCD)  

So far we've had $1.92bn of paper price year to date - a tiny amount compared to 2006, but progress nevertheless.

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