CLO volume remains light; ‘modest tailwinds’ ahead; loan market presents challenges for CLOs

By Cristal Cody

Tupelo, Miss., Oct. 30 – CLO issuance remains light but more volume is on tap for the weeks ahead, according to market sources on Friday.

“CLO issuance has dropped off steeply in the second half of the year, with prospective equity returns looking less attractive than in the past,” Barclays Bank PLC analysts said in a note on Friday. “After issuance of about $60 [billion] in the first half of the year, second half supply stands at a mere $23 [billion] thus far.”

In October, U.S. CLO managers priced $5.8 billion of deals, up from the $4.9 billion printed in September, according to Prospect News data and market sources.

Barclays said the recent sell-off in loans should be supportive of new CLO creation.

“Both the increase in excess spread, driven by persistent wider loan spreads after the sell-off, and the higher leverage in new issue equity tranches this year provide modest tailwinds for CLO issuance,” the analysts said.

“Loan supply has also picked up, and the forward calendar continues to look robust, which should keep collateral spreads healthy and help managers ramp new deals.”

Wells Fargo Securities LLC analysts said in a note on Friday that the loan market “now features distinct pricing bands” that represent a challenge for CLO managers.

The median U.S. post-crisis CLO portfolio exposure to loans trading above 0.98 is almost 70%, while the average exposure to loans trading below 0.90 is 9.2%, according to Wells Fargo Securities.

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