CLOs: Lower issuance, tightening ‘BB’ spreads, and new managers in 2020
admin | January 10, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
CLO issuance volume is broadly expected to drop in 2020, but CLO spreads, especially in the mezzanine tranches, will likely tighten. Most market participants anticipate new-issuance volume in 2020 to be $80 to $90 billion, alongside a slowdown in the primary supply of leveraged loans. But several predict it to be above $100 billion, as they see managers raising capital for their own platforms and issuing deals for reasons in addition to arbitrage. Spreads in CLO mezzanine tranches such as ‘BB’ are expected to tighten in 2020, in tandem with a recent rally in ‘B’ loans and a risk-on mood sweeping across U.S. capital markets since the end of 2019. Spreads on ‘AAA’ debt will likely remain flat, as Japanese bank Norinchukin — one of the largest buyers of CLO ‘AAA’ paper – is stepping away from the market. CLO managers are looking to European capital pools as an alternative. In 2020, 12 new CLO managers are expected to enter the market. On the heels of rising idiosyncratic risks in leveraged loans during the second half of 2019, CLO managers will need to show true mettle in 2020. The S&P article is here (subscription required). (S&P, APS)
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