By the Numbers

CLO owners | An update

Steven Abrahams and Caroline Chen | August 4, 2023

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.

Most of the growth in outstanding broadly syndicated loan (BSL) CLO debt through 2022 landed in portfolios outside the US, based on best updated estimates of CLO ownership. Outstanding BSL CLO debt grew by $91 billion last year, and an estimated $80 billion ended up in foreign hands. Bank holdings barely changed despite an 11.3% rise in debt outstanding. The surge in foreign holdings relies on the strong assumption that no other US investor increased their share of the outstanding market.

US insurers at the end of 2022 continued to hold 22% of outstanding BSL CLO debt, based on regulatory filings and tallies of CLO debt from Intex, unchanged from the year before (Exhibit 1). US banks held 18%, also based on regulatory filings and Intex tallies, down slightly from the year before. US mutual funds held 15%, based on TICS data from 2021 and assuming a constant share. And US pension funds, hedge funds and other nonfinancial organizations held a collective 14%, also based on TICS data from 2021 and assuming a constant share. Foreign holdings, estimated as the difference between total outstanding debt and debt reported by US portfolios, rose in share from 23% to 30%.

Exhibit 1: US bank share of CLO debt fell, foreign portfolio share rose

Notes:
1. Data sources for the domestic Holdings of Cayman-issued US CLO by 2021 YE: Exhibit 15 in TIC SHC (A) as of Dec 2021
2. Total domestic holdings of Cayman-issued US CLOs in 2022 YE by various investor types are estimated at the same % of outstanding CLOs in 2021, except for Banks and Other Financial Organizations holdings and Insurance holds, which used regulatory filing data (see notes 3, 4)
3. Data sources for $ 165 Bn holdings by Banks and Other Financial Obligations at 2022 YE: S&P Market Intelligence data. S&P data include top-tier bank holding companies and savings and loan holding companies that filed Form Y-9Cs.
4. Data sources for the $227 Bn holdings by US Life and P&C Insurers at 2022 YE: CreditSights. Insurers’ holdings of Cayman-issued U.S. CLO are assumed to be at the same % of the outstanding CLOs in 2021.
5. Estimated foreign holdings of Cayman-issued US CLO is the difference between Cayman-issued US CLO and domestic holdings of Cayman-issued US CLOs. Data source for total Cayman-issued CLOs: Treasury International Capital Data Line 26, Other Negotiable Instruments
6. Data sources: Exhibit 19 of TIC SHL(A) Foreign portfolio holdings of US Securities as of June 2022. Foreign holdings of U.S. Long-term Corp ABS (non-MBS) were $ 127 Bn and $142 Bn in 2021 and 2022, respectively. Estimate 6% of those holdings were CLO. 6% assumption is based on CLO holdings disclosed in TIC SHL (A) in 2018 and 2019.
7. Data sources for the outstanding US BSL CLOs: INTEX
8. Estimated domestic holdings of US-issued CLO is the difference between outstanding US BSL CLOs, total estimated foreign holdings, and total domestic holdings of Cayman-issued US CLOs

Source: Santander US Capital Markets

Estimates of CLO ownership, based on sources and methods first introduced by the Federal Reserve (here and here), show a market dominated in the US by insurers, banks and mutual funds. While a wide set of insurers own CLOs, most of the ownership in banks is highly concentrated in a few large banks that almost exclusively own ‘AAA’ classes. A variety of mutual funds also own CLOs, mainly ‘AAA’ and other investment grade classes.

The heavy share of the market owned by US insurers and banks exposes valuations to pending regulatory changes in each sector. The National Association of Insurance Commissioners is in the midst of a review of capital requirements widely expected to raise capital required for CLO equity and speculative grade classes of debt. Banks regulators have recently proposed rules that would raise broad bank capital requirements and discourage investment portfolio interest rate risk, the later possibly encouraging bank interest in floating-rate CLO debt.

The substantial foreign holdings in CLOs make that demand sensitive to local interest rates and the exchange rate to the US dollar.

In October, the US Treasury will release the next round of data allowing estimates of US holdings of Cayman-issued CLOs, which includes the majority of CLOs brought to market.

Steven Abrahams
steven.abrahams@santander.us
1 (646) 776-7864

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

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