TRLPC: Energy-heavy US CLOs trade down in secondary amid volatility

Fri Nov 13, 2015 10:14am EST
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By Kristen Haunss

NEW YORK Nov 13 (Reuters) - Investors are shying away from US Collateralized Loan Obligation (CLO) funds with high energy holdings and the value of their debt is falling in the secondary market as CLO issuance tumbles in a turbulent environment for the biggest buyers of leveraged loans.

US CLOs have an average exposure of about 3% to oil and gas companies, but nearly 20 funds hold more than 10% of assets from the troubled sector, according to Thomson Reuters LPC Collateral data. The 16% drop in oil prices since the start of the year has weighed on these portfolios.

"The oil and gas sector has the highest share in total distressed collateral of US CLOs," Morgan Stanley analysts led by Richard Hill wrote in a Nov. 5 report. "Investors need to take note of both the overall CLO exposure to these sectors and the relative level of distress in each sector."

Average bids on US oil and gas loans have fallen 7.3% in the secondary market this year to 83.37 on Nov. 10, and 10.1% from a 2015 peak of 92.78 on May 14, according to LPC data, as defaults by energy companies increase.

US CLO issuance is lagging 2014's record volume as the industry attempts to deal with market volatility and looming regulations. There has been US$87.5bn of CLOs arranged in the US this year, compared to US$107bn in the same period of 2014, according to LPC Collateral data.

Spreads on AAA slices, the largest part of CLOs, widened to 152bp on Oct. 16 and BB spreads were at 750bp, according to Morgan Stanley data, as investors seek higher pricing in a volatile market. Allstate issued a US$501m CLO in November with a US$280m AAA slice that pays 170bp, which is among the highest priced senior tranches this year, according to LPC Collateral data.

Recent Bids Wanted In Competition (BWIC) sales of CLO tranches in the secondary have shown that funds with significant energy exposure either trade at lower levels than managers with less energy holdings or does not trade, sources said.

In a sample of approximately 920 US CLOs, about 18 have oil and gas exposure of more than 10%, with three holding 14-14.5% of the portfolio in that sector, according to LPC Collateral as of Oct. 21. More than 480 CLOs have exposure of 3-10% and another 44 have holdings of less than 1%. Almost 100 CLOs in the sample have no energy exposure.   Continued...