STRUCTURED WEEKLY: Global CLO Market Approaches Trillion Dollars

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If you listen to the people in the trenches, the secured loan bond market is having a great year.

The amount of bonds outstanding is now approaching $ 1 trillion globally, according to JPMorgan Chase & Co., after defying doomsday predictions made during last year’s economic crisis, according to conference attendees. IMN’s virtual CLO industry this week. CLOs hold attractive value across all rating levels, which may attract more investors as yields decline in other parts of the credit markets, said Chris Saltaformaggio, CLO investor at New York Life Investors.

The agreements, bundles of undesirable rated leveraged loans that are grouped into tranches of variable risk and return, worked “as advertised,” the panelists said, the setbacks suffered by inclement weather last year due to the pandemic and even bouncing and blossoming to new heights. The rebound comes after the CLOs have been tried too troubled for even the Federal Reserve’s stimulus to help.

Sales on track to hit an annual record, Bank of America Corp. forecasting $ 360 billion in CLO issuance in the United States this year alone. This estimate includes $ 140 billion for new issues and $ 220 billion for refinances and resets of old transactions. Current U.S. CLOs now exceed $ 700 billion, panelists said, while the The European figure is close to 186 billion dollars.

The return of the CLO

New issue sales of CLO in the United States could hit record this year, says BofA

Source: Bloomberg, Bank of America

“Human bandwidth is a real issue in our market,” especially as June and July will continue to be busy months, said Saltaformaggio.

A familiar name

CLO sales have reached more than $ 62 billion for new issue deals in the United States so far in 2021 – 158% more than the same period in 2020 – and more than $ 107 billion combined refinances and resets, according to data compiled by Bloomberg.

“CLOs are more and more of a household name; they’re more institutional now, ”and appearing as a staple in many diversified fixed income portfolios, said panelist Ronnie Jaber, portfolio manager and head of structured credit at Onex Credit Partners. “Investors see that there is real value here, tested through multiple downturns, and depending on their tolerance for risk, they can make money right down the stack of capital.”

Other factors contributed to the rebound. For example, the largest American banks have has re-entered the market, particularly in the senior segments, and the critical presence of Asian investors has also returned, the panelists said.

The number of AAA investors has increased this year, which has been healthy for price discovery, according to Jim Stehli, managing director of Mizuho Securities, speaking in a session on Wednesday.

The CLO market has also been supported by increased demand for floating rate debt as many market participants expect rates to continue to rise, making fixed-rate securities less attractive. Last year the market was helped by the Fed’s support for the the riskiest companies – those that issue leveraged loans – as well as the portfolio managers who trade in perilous loans, protections built into agreements and lower than expected number of defaults.

‘Candy store’

Not only the CLOs Still seem cheap for other fixed income sectors such as corporate bonds, but relative value opportunities can be found up and down in the capital structure itself, the panelists said.

While speakers found CLO stocks and mezzanine bonds the most compelling yet – BBs being the investor favorite – some, including New York Life’s Saltaformaggio, also find a risk-adjusted spread in AAAs and AA.

“So basically you walk into a candy store where all the candy has high nutritional value,” said panel moderator Ann Rutledge, CEO of CreditSpectrum Corp., summing up the many CLO investment opportunities discussed by them. speakers.

CLO stocks are the “sweet spot” and “equity returns are phenomenal,” said Ujjaval Desai, head of structured products investing at Sound Point Capital. “We are currently seeing significant trade arbitrage driven by leveraged loans with a Libor floor. The cash income going into CLO structures is now huge. “

Laila Kollmorgen, CLO portfolio manager at PineBridge Investments, prefers CLO stocks over other types of private credit and direct lending because they are more diversified and have a higher level of liquidity. PineBridge likes CLOs across the entire capital pile, the current sweet spot being BBs, she said during Thursday’s panel. However, “every CLO is idiosyncratic,” she warned.

As for the challenges looming on the horizon, panelists worry about inflationary pressures on businesses and watch for excessive growth and government stimulus measures, which will be problematic if the costs of a struggling business cannot be passed on adequately to consumers. . The specter of the so-called “zombie businesses ”is real, and even if a handful of credits do eventually explode, it can affect CLO stocks and BB classes, the panelists said.

Another concern is that fixed income valuations are currently extremely tight. A change in stocks or high-quality credit could ultimately put pressure on different parts of the CLO, Saltaformaggio warned.

Relative value:

  • CLOs remain “reasonably attractive” and stocks remain a key trade with the short-lived mezzanine, according to Rishad Ahluwalia, head of global CLO research at JPMorgan, speaking at a panel on Wednesday at the conference IMN virtual CLO

Quotable

“The CLOs are a unique product; they’re just different animals, ”said Saltaformaggio of New York Life. “Whether it’s because these are actively managed portfolios, or because their callability structure, uncertain weighted average lifespan, negative convexity or constant document trading, these things just don’t exist. elsewhere in fixed income areas, even in other securitized loans. sectors. “

And after

Pending ABS agreements include AG Resource Management (crop loan ABS) and Thrust Engine Leasing (aircraft ABS).

– With the help of Dan Wilchins

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