July 3 (Bloomberg) -- Sales of collateralized loan obligations, which finance buyouts and mergers, have tripled this year as investors seek out higher yielding assets even as Europe’s debt crisis has stalled the global economic recovery.
Seven deals were issued in June for a combined $3.2 billion, bringing this year’s total to $17 billion, according to a June 28 Wells Fargo & Co. report. Companies offered $5.9 billion of CLOs in the first six months last year and $12.9 billion in all of 2011, the report shows.
Issuance of the securities has climbed this year at a “slow and steady pace” amid a sovereign-debt crisis in Europe and heightened volatility across markets, Wells Fargo analysts including Dave Preston and Zachary Bolster wrote in the report. Transactions were completed even as relative yields on CLOs widened in the second half of last month.
“Investors can most likely find amenable pricing terms, as managers attempt to finish CLOs ahead of additional future volatility,” the analysts wrote in the report. “Specifically, savvy investors may find bargains in the single A and BBB tranches.”
CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return.
CLO slices rated A by Standard & Poor’s have traded at spreads ranging between 550 basis points to 700 basis points more than benchmark rates, while the level for the BBB portion is around 800 basis points to 900 basis points, according to Well Fargo research. The least risky AAA portion of the funds trades between 170 basis points and 200 basis points, the report shows. A basis point is one hundredth of a percentage point.
Last week, Credit Suisse Group AG raised a $413.4 million CLO for Prudential Investment Management Inc., according to data compiled by Bloomberg. The Dryden XXIII Senior Loan Fund includes a $270.5 million portion rated AAA by S&P that has a coupon that pays 149 basis points more than the London interbank offered rate.
CIFC Asset Management LLC’s $464 million fund priced a $280 million slice rated AAA with a coupon of 144 basis points more than Libor, which is the rate at which banks say they can borrow in dollars from each other.
“It remains to be seen how much volatility the primary market can withstand, but continued primary issuance is a positive for CLO investors and managers,” the Wells Fargo analysts wrote.
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