By the Numbers

Aging CLO warehouses add to primary market challenges

| June 24, 2022

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.

For the growing number of CLO deals stuck on aging warehouse lines, the recent softening in the loan market has made it harder to find an exit. The broad loan market has lost 5.4% year-to-date, leaving many warehouse portfolios below their purchase price and possibly requiring an injection of fresh equity to get out the door. The CLO primary market is likely to stay soft with an increasing supply overhang.  For investors, new issue spreads could remain wide until the warehouse situation resolves.

Nearly 80% of warehouses under administration by US Bank in May were aged three months or more, a 14% rise from January (Exhibit 1).  The trend is most palpable in warehouses aged nine months or more, which has gone from 10% of total warehouses in January to 30% in May.

Exhibit 1. Aged warehouses continue to build up

Note: Warehouse data is shown for the reporting month, reflecting activity the month before.  Data reflects only warehouse lines administered by US Bank.
Source: US Bank, Amherst Pierpont Securities

Overall, U.S. Bank reported nine new warehouses open in May and nine closed to CLOs, making the total number of warehouses under its administration unchanged at 112. US Bank is the largest warehouse administrator with more than a 50% market share.

Warehouse traded par coincides with the trend seen in the total open warehouses.  The aggregate traded par has been stable at around $25 billion in the past four months, but the share of traded par from aged warehouses has kept rising.  Warehouses aged nine months or more has $10.7 billion in traded par or 43% of the total, almost double the January share of 22%.  The average traded par in each deal was at $222 million, unchanged from the prior report.

Exhibit 2.  The aggregate traded par of aged warehouse has moved upward since January

Note: Warehouse data is shown for the reporting month, reflecting activity the month before.  Data reflects only warehouse lines administered by US Bank.
Source: US Bank, Amherst Pierpont Securities

An increasing share of aged warehouses implies a supply overhang.  Under current market conditions, the share of aged warehouses looks likely to linger. If loan prices remain soft with recession odds increasing, the aged warehouses that had loans purchased near par will stay under water. The economics for issuing a CLO depend on a loan price recovery.  But unlike the onset of pandemic, a quick rebound may not happen this time as the Fed looks unlikely to pump liquidity into the system.  Prospects for issuance look murky.

Lastly, some recent warehouses are short-term, “price to close” type.  CLO managers use those short-term warehouses to purchase loans at discounted dollar prices and execute a capital market takeout in a very short period.  Those CLOs are often structured with a shorter non-call and reinvestment period.  A flurry of short CLOs have priced in June (Exhibit 3).

Exhibit 3: A handful of June CLOs may exit from “price to close” warehouses

Source: US Bank, Amherst Pierpont Securities.  Data reflect 19 BSL CLO priced in June as of 6/20/2022

The share of aged warehouses most likely will stay elevated until leveraged loan prices recover. The $66 billion of new CLO issuance year-to-date has proved the market somewhat resilient, but the supply overhang indicates challenging conditions will persist.

Caroline Chen
caroline.chen@santander.us
1 (646) 776-7809

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