By the Numbers
The cost-of-funds advantage for frequent CLO issuers
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. This material does not constitute research.
Frequent issuers in the CLO market usually get a lower cost of funds as reflected in their ‘AAA’ margins. That likely prices in better liquidity in the debt, although a tendency to hold stronger collateral could contribute, too. The lower cost of funds, all else equal, improves return on equity and the ability to continue issuing. This year, the spread numbers for frequent issuers look a little noisy, but the result still holds. The big just keep getting bigger.
Clearly tighter spreads for frequent issuers is not showing up in aggregate statistics so far this year, but that could just reflect the big swings in CLO spreads since January. Infrequent issuers could come to market early this year at relatively tight spreads, but the market has since effectively closed for them. Frequent issuers, on the other hand, have been able to come to market early this year and again since May but at wider spreads. The flow of frequent issuers since May has biased the picture wider. If infrequent issuers tested the market today, they would likely trade wide to their competitors.
Exhibit 1: Frequent CLO issuers usually get tighter margins and lower cost of funds
Note: Data as of 16 Aug 2022.
Source: USBank
The market this year has highlighted one strategic value of frequent issuance in CLOs: access. A lower cost of funds in all markets helps equity, all else equal, making it easier raise more equity and grow the platform. Larger platforms have lower marginal costs for building credit teams and other infrastructure and responding to investors. But frequent issuers also have had access to the market through this year’s spread volatility, easing pressure on warehouses and possibly allowing those platforms to capitalize on wider loan spreads. Frequent issuers are likely to come out of 2022 stronger than when they went in.
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