The Big Idea

The pipeline of new CLO deals continues to grow

| October 25, 2024

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.

The pipeline of CLOs looking to come to market continued to grow through September, based on the latest warehouse report from USBank. The bank showed 93 warehouses in place, up from 73 in June. And that is despite tighter loan spreads and higher loan prices. The rising tally suggests heavy CLO issuance will continue at least into next year if loan spreads hold at current levels or go tighter.

The number of CLO deals working through warehouses administered by US Bank rose by eight in September to 93, the high mark since February (Exhibit 1). That count continues to rebound after hitting a low in June of 73. The rising count reflects both rising interest in issuing CLOs as well as possible shifts in USBank share.

Exhibit 1: The count of open CLO warehouses rose to a 2024 high of 93

Source: USBank, Santander US Capital Markets

The latest jump naturally reflects a surge of new warehouses. Warehouses open 30 days or less rose from 7% in August to 16% in September (Exhibit 2). The share open for 90 days or less, presumably all deals that continue to ramp before pricing, has climbed to 40%, the highest share since February.

Exhibit 2: Warehouses open 90 days or less make up 40% the total

Source: USBank, Santander US Capital Markets

The rising count of warehouses coincides with tighter spreads in the loans financed. Those loans carried a weighted average spread of 3.47% from June through August, but that dropped to 3.37% in September (Exhibit 3). The mix of rising warehouse count and tighter spreads presumably means CLO cost of funds has also dropped enough to still offer incentives for CLO equity shareholders. It is also possible that the surge in new warehouses has helped narrow loan spreads.

Exhibit 3: The average spread on financed loans dropped to 3.37%

Source: USBank, Santander US Capital Markets

The tighter spreads were reflected in a higher price for financed loans. That jumped from $99.15 in August to $99.38 in September (Exhibit 4). As loan prices rise, CLO equity has to earn a larger share of return from net interest income rather than price appreciation.

Exhibit 4: The average price of a financed loan hit a 2024 high at $99.38

Source: USBank, Santander US Capital Markets

Not only have warehoused loans entailed tighter spreads and higher prices, the weighted average life has also extended, landing in September at 5.39 years (Exhibit 5). The longer average life suggests warehouse portfolios continue to add spread duration.

Exhibit 5: The weighted average life of warehoused loans continues to rise

Source: USBank, Santander US Capital Markets

Portfolio diversification changed little in September, with the share of financed loans coming from the Top 5 industry groups coming in at 37.2%, up 0.1% from the month before (Exhibit 6).

Exhibit 6: Portfolio diversification changed little in September

Source: USBank, Santander US Capital Markets

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

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