Although banks in Europe are proving far less prepared than their US counterparts to sell off the backlog of leveraged loans that they have been left with after the summer, which amounts to $100 billion (see feature page 98), a steady stream of CLO deals has been hitting the market on both sides of the Atlantic. In the US there have been new deals for Halcyon Structured Asset Management, Highland Capital, Symphony Asset Management, Stanfield Capital Partners and Pimco, and in Europe €1.8 billion-worth of CLO trades priced in one week in November. Deals have been launched for Lightpoint, Alcentra, ICG, Permira, Carlyle and Harbourmaster.
Artificial prices
However, things are far from back to normal and many question the levels at which these deals are getting done. "The headline bond volumes and coupons may not be all that instructive of the true extent to which new issues are being placed with end investors and at what prices," says Ganesh Rajendra, head of European ABS research at Deutsche Bank in London. Others put it more bluntly: "The deals that we are seeing printed are the ‘walking dead’," says one asset manager. "People are clearing warehouses and there is no indication what the underlying cost is. A lot of the pricing on CLOs at the moment is artificial." Indeed, both deals backed by warehoused and post-crunch loans seem to be being offered at discounts to par. He reckons that for the numbers to work in the present market, asset spreads need to be about 350 basis points over Libor.
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CLOs: a respectable recovery |
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Average monthly 2007 volumes, Europe |
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Source: DB Global Markets Research, DBIQ |
The true health of the market will be evident when the pre-summer warehouses have been cleared. Fitch’s announcement that it is to review its rating methodology and model assumptions for all new CDOs (something the market must surely welcome) created an artificial deadline for deals in the market of November 15 and will have given managers an incentive to get deals out under the wire. Some investors are cautious about new trades while the collateral market is still in flux, because if spreads come back in on leveraged loans then CLO equity will get squeezed.
Indeed, many CLO equity investors are moving their attention from CDOs to credit opportunity funds because of their ability to short. Although this appears a logical move, one CLO manager reckons that the benefits are being overplayed. "For private deals (which is most of the leveraged loan market in Europe) you can only go short by shorting LevX – and CLOs have short buckets anyway," he grumbles.