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CLO primary market quiet, secondary active; middle-market space grows, spreads tighten
By Cristal Cody
Tupelo, Miss., Jan. 3 – The CLO primary market remained quiet to start the year, while the secondary market is active.
On Tuesday, $59.97 million of investment-grade CBO/CDO/CLO issues and $47.77 million of non-high-grade securities were traded, according to Trace data.
In the primary market, the middle-market space is expected to stay active in 2018 following increased supply and tighter spreads in 2017, according to a Wells Fargo Securities, LLC analysts’ report on Wednesday.
“Entering 2018, we summarize the middle market CLO landscape as: more capital, more issuers, more leverage, lower quality loans,” the analysts said.
“Four new middle market CLO managers issued a CLO in 2017, following four debutantes in 2016; for the full year, 16 managers issued MM CLOs in 2017 – a 78% increase over the count of MM CLO issuers in 2013. Investors have flocked to middle market/private credit, but loan volume has not kept pace.”
The basis on AAA spreads between broadly syndicated loan and middle market CLOs tightened in the second half of 2017, “as the gap moved to 40 [basis points] or less, down from 55 bps-65 bps in Q1 2017,” the Wells Fargo analysts said. “The last time the MM CLO–BSL CLO AAA basis was this tight was in H1 2015.”
A jump in demand for middle-market CLOs from large AAA investors, including non-U.S. banks, U.S. insurance and bank investors, is attributed to in part driving the tightening in spreads, according to the report.
Middle-market CLO AAA spreads reached their tightest point to broadly syndicated CLO AAA spreads in late 2013/early 2014, the analysts said.
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