By the Numbers

The cost-of-funds advantage for frequent CLO issuers

| August 19, 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.

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.

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

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles