Managers ink new deals as US CLO market booms

The US CLO market has remained resilient after a strong 2012, with a record volume of $9.9 billion of funds issued last month according to JPMorgan. In response to growing demand for CLO instruments, debt fund managers ING Asset Management and 3i Debt Management (3iDM) have priced in two new CLOs over the last week, at $618 million and $500 million respectively.

3iDM refinanced a $500 million collateralised loan obligation fund, Jamestown II, which will focus on investing in corporate debt and senior secured loans backing private equity buyouts in the United States. The CLO is a refinancing of the $400 million Fraser Sullivan CLO launched in February 2011, which has now reached the end of its two-year reinvestment period, the firm confirmed with Private Debt Investor.

3iDM issued an aggregate $460 million of investment grade debt in six classes, in addition to $50 million of subordinated notes. The refinancing will extend the investment period of the CLO fund and increase its size by US$100 million, thereby generating further fee income for 3i. 

Jeremy Ghose, chief executive of 3iDM told Private Debt Investor:  “In the last four months, 3i Debt Management has successfully raised US$950 million. We are expanding our debt business and generating further income from third-party assets under management.”

Ghose explained the strong performance of Fraser Sullivan has resulted in a number of new and existing investors committing to Jamestown II. “This year, projections for CLOs stand at an excess of $60 billion to be raised by the end of the year. New deals are being created and the market is really opening up,” said Ghose.

“The US market will continue to perform robustly, and large funds managers with strong balance sheet will continue to use their strengths appropriately,” added Ghose.

Meanwhile Citigroup priced a $618.35 million CLO for ING Alternative Asset Management last week. Dan Norman, managing director at ING US Investment Management, predicts the global hunt for yield will not abate anytime soon.  “2012 emerged as a favourable year for the global senior loan market, and this is where the robust performance of CLOs derives from.

 “Our focus when we raise CLOs is US domestic senior loans; this is where returns are high-yielding and stable,” emphasised Norman. “The US credit market will be strong over levels that we witnessed in 2012, and we anticipate a strong year of CLO formation.”

Elsewhere, HIG WhiteHorse, an affiliate of private equity firm HIG Capital has closed its $415.5 million collateralised loan obligation (CLO) fund last week, investing across the US syndicated loans space.

ING's Norman expects fundamental credit to remain stable. “Loan prices are expected to remain firm, and we will be patiently waiting for a shift in monetary policy that will eventually encourage rates to rise.”

Looking ahead, Norman expects default rates to remain low, “as the 2013 maturity wall standing at a whopping $28 billion last year has been reduced to a measly $4.7 billion,” he added. For all these reasons, Norman estimates default rates will hover around 2.04 percent which in 2013, although higher than last year, would still be well below the long term average of 3.3 percent.

Both 3iDM and ING US Investment Management expect 'healthy demand' for new CLO issuance and loan mutual fund inflow, and estimate the asset class to provide targeted total returns between 5.5 percent and 6 percent this year. Ghose expects volume to reach $60-70 billion, by the end of 2013, while Norman forecasts that volume will be in excess of $70 billion. 

“There will also be a handful of CLOs launched targeting European investors in the coming year. It all dependants on the market, and how long it takes to ramp enough loans,” said Ghose. “The primary market in private equity and M&A activity needs to be functioning in order to be able to raise CLOs. We can’t fill the CLOs with hot air; we need an active loans market.”