By the Numbers

CLO issuance is down by par balance but not by manager count

Caroline Chen | September 22, 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.

Even though the par amount of new CLOs backed by broadly syndicated loans (BSL) has dropped year-over-year by 33%, the number of managers in the market is actually up. Repeat issuers continue to come to market with smaller deals, and a handful of new managers have debuted, too. Competition between managers remains sharp. And spread differences across managers’ debt remain wide, especially for new entrants.

More managers have issued one or two CLOs this year than in 2021 and 2022

Eighty-six CLO managers tapped the BSL CLO primary market year-to-date. By manager count, it was 11% lower than in 2021 during the same period, but 6% higher than in 2022 (Exhibit 1). In addition, 58 of the 86 managers are repeated issuers who issued CLOs in both 2021 and 2022.

Exhibit 1: Managers have stayed active in the primary market

Note: manager counts are based on LCD Pitchbook’s manager codes. For example, Marble Point and Investcorp are counted as separate managers in 2021 and 2022. Carlyle and CBAM are counted as separate managers in 2021. But Wellfleet and Blue Owl are counted as one manager in 2023 despite two manager codes in LCD database.
Source: LCD Pitchbook, Santander US Capital Markets LLC

The primary market has door open for newcomers

Several new managers have come to market. Five managers made their BSL debut year-to-date, including one who traditionally played in middle market loan CLOs. BH Credit, one of this year’s new managers, has already issued two CLOs this year (Exhibit 2). The issuance from debut managers represents 4% of total BSL CLO issuance year-to-date.

Exhibit 2: A list of new kids on the block

Note: issuance YTD as of September 15, 2023. $ in millions.
Source: LCD Pitchbook, Bloomberg, Santander US Capital Markets LLC

Pricing tiering remains discernible in the new issue market this year. For example, the difference between the tightest and the widest ‘AAA’ priced in a month of this year ranged from a low of 42 bp in April to a high of 70 bp in January. Many factors may influence a manager’s pricing in the primary market, such as their performance track record, liquidity in the secondary market, or frequency of new issuance. Bonds from debut managers were priced at the wide end of the range as expected (Exhibit 3). They may look especially appealing to investors who are looking to get highly rated paper.

Exhibit 3: Debut managers priced their ‘AAA’ wider than half of ‘AAA’ new issuance

Note: the tightest and widest DM reflects all deals priced in that month regardless of the length of their reinvestment periods. 5NC2 stands for a deal with a 5-year reinvestment period and a 2-year non-call period. The percentile rank does not include junior ‘AAA’s or fixed-rate ‘AAA’ bonds. For Wellington CLO 1, the tightest and widest DM represent five deals priced in between 9/1 to 9/15.
Source: LCD Pitchbook, Santander US Capital Markets LLC.

The list of new kids may continue to expand. A $402 million BSL CLO from a debut manager, Katayma is marketing this week, with the ‘AAA’ pricing talk around 200 bp according to Bloomberg.

CLO new issuance may stay low and provide technical support to new issue spreads

While CLO managers have stayed active in the primary market, their average new issuance size has dropped. The median BSL CLO new issuance this year was $402 million as of September 15. It was $452 million in 2022 and $504 million in 2021 during the same period. The slowdown in leveraged buyouts and M&A activity has contributed to a large drop in institutional loan new issuance. Net loan supply has stayed negative year-to-date after factoring in loan repayments (Exhibit 4). Unless the loan market starts to see rising activity, CLO new issuance may stay at the lower end, which may in turn provide technical support for new issue spreads if investor appetite stays unchanged.

Exhibit 4: Net loan supply turn negative this year after factoring into repayments

Note: $ in billions. Net loan supply = Institutional loan issuance – loan repayments
2023 YTD as of August 31, 2023
Source: LTD Pitchbook, Santander US Capital Markets LLC

CLO new issuance may not be back to the 2021 level soon, but the market has proved its resilience. A large number of CLO managers have shown their ability to issue deals in bull and bear markets. While CLO arbitrage may remain challenging, the market is still open for new managers. For investors, the more active managers, the more opportunity may arise for relative value.

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.

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