By the Numbers
A steady pipeline of CLO deals works its way through warehouse
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An increasing flow of new CLOs able to navigate tightening loan spreads and rising dollar prices is working its way into the market, according to the latest snapshot of CLO warehouses from US Bank. Although issuance remains dominated by refinancings and resets, those deals look set to come to market in the next few month.
The pipeline of CLO deals working their way through warehouses administered by US Bank grew by four in August to 85, up after dipping in June (Exhibit 1). The latest count is in line with most other months of the year.
Exhibit 1: The open warehouse count continues to bounce back from June
Source: USBank, Santander US Capital Markets
The growth reflects a rising tally of warehouses ramping up over their first three months. The share of warehouses open for one to three months has edged up from 37% in June to 39% in August (Exhibit 2).
Exhibit 2: More warehouses ramping up in their first three months
Source: USBank, Santander US Capital Markets
The growing pipeline comes despite loan spreads that tightened from February to June before hitting a momentary floor. Loans spreads stood at 3.73% in February, tightened to 3.47% by June and have held there since (Exhibit 3). The healthy pipeline suggests CLO costs of funds has declined at least in line with loan spreads, preserving the incentives for CLO equity shareholders to work towards a deal.
Exhibit 3: Loans spreads tighten and hit a momentary floor in June
Source: USBank, Santander US Capital Markets
The tighter spreads also get reflected in the generally rising average price of loans held in warehouse portfolio. That price stood at $98.83 in February but finished August at $99.15 (Exhibit 4). Loans with higher prices mean CLO equity earns more of its return from net interest income than from loan price appreciation.
Exhibit 4: Warehouse loan prices have moved higher year-to-date
Source: USBank, Santander US Capital Markets
As loan prices have gone up, so have the weighted average lives of the warehouse portfolios. Average WAL has hovered just above 5.0 for months before rising to 5.25 in August (Exhibit 5). That adds a bit to the spread duration of the average portfolio.
Exhibit 5: The average loan gets longer in August
Source: USBank, Santander US Capital Markets
The average warehouse portfolio meanwhile is becoming slightly more diversified across industries. The share of portfolio in the Top 5 industries peaked at 39.1% in April but has fallen to 37.1% in August (Exhibit 6). The current Top 5 include business services (12.6%), technology (8.4%), technology services (5.9%), manufacturing (5.7%) and healthcare (4.5%).
Exhibit 6: Share of warehouse portfolio concentrated in the Top 5 industries
Source: USBank, Santander US Capital Markets
Unlike refinancings or resets, new deals give investors an underlying portfolio generally without legacy issues, including loans with eroding credit. Spreads in lower-rated classes of CLO debt consequently reflect market expectations of managers’ ability to manage credit—expectations that differ significantly across managers. Market opinion of manager expertise should give investors an opportunity to crowdsource the expertise of ‘BB’ investors and end up with better ‘AAA’ investments along the way.
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