The European CLO market finally reopened late on Monday when two new issues, first from Permira Debt Advisors and then from Apollo's Redding Ridge Asset Management, priced one after the other. Pricing details for a third deal, from KKR, emerged on Tuesday.
The market had been shut since March 11, but several managers have been exploring new deals and new structures with investors.
Permira sold Providus CLO IV via arranger Citigroup. Like the manager's previous CLOs, the underlying loans were selected according to ESG criteria.
But unlike those trades the deal is small at just €207.5m. Pricing details show five tranches rated by S&P and Fitch from Triple A to BB-, and all priced below par. Under normal market conditions only Double B and Single B tranches are routinely priced below par.
The Triple As make up some 54% of the debt structure, compared to 61% for Permira's previous CLO in June last year.
A large subordinate piece weighs in at €34.2m, or 16% of the structure. In the previous deal the subs and the Single B tranche combined made up 12%.
The non-call period and reinvestment periods are also much shorter than normal, both at one year compared to the typical two years of non-call and 4.5 years for reinvestment.
The short non-call period combined with the below-par pricing appears designed to attract investors expecting the economy and the CLO market will have recovered enough to encourage a par call after one year.
The Triple As were sold at a discount margin of 200bp over three-month Euribor, the Double As at 300bp, the Single As at 400bp, the BBB/BBB- tranche at 625bp and the BB-/BB- tranche at 1025bp.
It is not clear when the loans in the portfolio were bought. One source away from the deal said it appeared to have been downsized from an initial €350m-€400m which could indicate Permira had hoped to bring a deal less than 50% ramped up.
That would have provided it with funds to buy new loans at discounted prices, taking advantage of fallen loan prices.
Citigroup and Permira could not be reached for comment.
Market sources said another manager, Oaktree, had been exploring a new issue at a low ramp of potentially 35% two or three weeks earlier, providing firepower to pick up low-priced assets, but nothing has since been seen on that transaction.
And prices for many loans have since recovered much of the ground they had lost.
"Some managers probably took the view that they could buy performing good quality names in the 80s or 90s and run the CLO that way," one investor told IFR last week.
"But if you're now buying those loans at 95% or higher, that becomes problematic.
"And if you're buying troubled names in, say, the 70s, I don't think there are many debt investors that will give you money for that," the investor said.
Given the speed with which parts of the loan market recovered, the window for building a new CLO - given current wide prices for the debt - may well have closed.
While market participants say Permira's CLO was widely syndicated, that was not the case with the other two new issues.
Redding Ridge's CLO, arranged by BNP Paribas, was sold off an already existing SPV, Zinnia Finance, rather than a new SPV named under the manager's "RRE" series.
A source said the portfolio was already well-ramped. The deal has a longer non-call period and a longer-reinvestment period than Permira's Providus. The non-call ends in November 2021 and reinvestment can run to April 2023.
The €300m Zinnia sold its Class A1, rated Triple A by Moody's, S&P and KBRA, at 225bp over three-month Euribor, while the Double A rated Class A2 came at 350bp. Those tranches were priced at par.
The issue prices were not disclosed for the rest of the stack. Rated only by S&P and KBRA, the AA-/AA- tranche came at 375bp over three-month Euribor, the A-/A- at 425bp and the BBB-/BBB- at 575bp.
Pricing details for the third new issue CLO since the market shutdown, KKR's Avoca CLO XXIV, were seen on Tuesday afternoon. Citigroup arranged the €339m transaction, which has a one-year non-call and a three-year reinvestment period.
All rated notes were priced below par. The A1, rated Triple A by S&P and Fitch, printed at a 195bp DM. Coming pari-passu is a Class A2 at the same rating but subject to a Euribor cap of 1.5%.
The Double As were priced at a 275bp DM, the Single As at 375bp and the BBB-/BBB- tranche at 625bp.