CLO market faces strong post-Labor Day supply in September; AAAs expected to soften

By Cristal Cody

Tupelo, Miss., Sept. 8 – Primary action is expected to ramp up in the CLO market in September, while activity so far has been light, market sources report.

CLO spreads improved over the thin supply in August with AAAs now about 20 basis points to 25 bps tighter, Wells Fargo Securities, LLC analysts said in a structured products research note on Tuesday.

August CLO volume was the slowest since January 2017, excluding March and April when issuance came to a standstill at the pandemic’s start, the analysts said.

While AAA spreads tightened in the previous month, the pace is expected to slow and reverse by the end of September, according to the note.

“Amid strong fixed income technicals, demand is high, but we expect CLO supply to meaningfully pick up in September,” the analysts said. “Based on rating agency reports, and conversations with investors and CLO managers, post-Labor Day CLO issuance is expected to be very heavy.”

A rush to issuance is anticipated as risk appetite wanes near the U.S. presidential election in November and due to currently tightening CLO liability spreads, according to the report.

About $48 billion of new CLOs have priced year to date, according to market sources.

In other activity, Moody’s Investors Service said in a structured finance report on Tuesday that it held a series of calls and virtual meetings with issuers, investors and arrangers around the globe about the state of structured finance amid the coronavirus pandemic.

“The ability to warehouse assets, a key component to issuing deals, remains constrained after non-bank lenders, especially in U.S. consumer asset classes, were hit hard by reduced financing options,” the report said.

“A number of underwriters said that the ability to remain nimble and quickly execute a transaction is crucial in a rapidly changing environment – in some cases locking in investors and printing a deal has been done in less than a week,” Moody’s notes. “The window for ‘print and sprint’ U.S. CLOs, for example, was very narrow in light of loan prices that have rallied over the past few months.”

CLO managers also noted recent efforts to rotate portfolios into higher quality assets and away from more vulnerable industries, as well as using structural features that allow them to take advantage of market conditions through trading, including buying discounted assets to build par and swapping discount assets or credit risk assets for assets of higher quality, Moody’s said.

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