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January 2024 | Issue 260
Analysis
CLOs
Banks predict steady year ahead
It’s the season for predictions and the CLO market is no exception, with all the banks having their say. We’ve rounded up their forecasts for new issuance and resets in the US and Europe
CLO issuance 2016 to 2024 (predicted)
*YTD figures are as at December 2023 Source: Creditflux
Consensus view
US issuance:
$108bn (new)
$45bn (resets/refis)
European issuance:
€24.4bn (new)
€10bn (resets/refis)
Middle market issuance:
30% of US total
Issuance:
The consensus in the market seems to be that 2024 will be either flat or bring a small uptick in issuance in both the US and Europe. Analysts are predicting an uptick in the European reset/refi market.The big trend being predicted is the continuing growth of middle market CLOs. The consensus is for strong issuance growth up to around 30% of total US new issue volumes.
Deutsche Bank
US issuance:
$115bn (new)
$45bn (resets/refis)
European issuance:
€27bn (new)
€9bn (resets/refis)
Middle market issuance:
25-30% of US total
Issuance:
“The first half will likely be slightly cooler than the second half, as the final scene of this economic cycle is yet to be acted — however, the new cycle’s opening prologue in H2 should lead to an uptick in deal activity in the back half of the year, aided by supply-side technicals like lev loan issuance and constructive loan and spread pricing reflecting the shift in tone.”
Spreads:
“Assuming economic cooling in H1 of 2024, spreads will likely widen during the first half of the year and reach the mid-to-high 180s (SOFR, bps) for AAAs and mid-500bps for BBBs. The back half of the year will likely be a different story, with the end of cycle dynamics being replaced with an early cycle re-trace in pricing.”
Trade ideas:
“Securitisation is still cheap relative to corporate credit. This provides a spread pick-up and yield opportunity. From a positioning perspective, it is better to move up in credit (BBBs and above) and favour shorter duration due to the likely credit and price softening ahead. “The assumed H1 spread widening should provide an attractive entry point, particularly with an inflection point expected in H2 that should send rates lower and allow spreads to tighten.”
BNP Paribas
US issuance:
$100bn (new)
$40bn (resets/refis)
European issuance:
€25bn (new)
€10bn (resets/refis)
Middle market issuance:
$30bn (new)
Issuance:
“We expect new issue CLO supply to be slightly down in 2024 versus 2023, as a result of the still difficult arbitrage conditions and the dwindling ‘captive equity’ capacity from some CLO managers.”
Trade idea:
“In terms of relative value versus other credit products, we see better value in Euro CLO BBBs as they have lagged the recent credit rally. Within IG, we have a preference for short duration profiles, ie (1) ‘high coupon’ bonds or (2) ‘fast deleveraging’ bonds. High coupon bonds are bonds issued post Q1 2022, with a coupon above market spread levels (trading at a premium price). The high carry makes those bonds look attractive, even when run to their next call date.”
Trade ideas:
“Buy CLO IG bonds with fast deleveraging potential once they exit their reinvestment period (RP). Currently, ~35% of all CLOs (US and Euro) have exited their RP (mostly from the 2018 vintage) and the percentage could grow to ~45% by the end of 2024. As most of the post-RP IG bonds trade at a discount price (given their relatively low coupon), the faster the speed of deleveraging, the higher the realised returns. We see better value in IG bonds from fully static CLOs, where we believe any upside potential is not fully priced in by the markets.”
JP Morgan
US issuance:
$110-120bn (new)
$50bn (resets/refis)
European issuance:
€25bn (new)
Middle market issuance:
30% of US total
Issuance:
“CLO origination is holding up pretty well even after rolling volatility and Fed tightening, but our $110-120bn forecast is still lower than several top years as we don’t expect material improvement. “Our spread expectations suggest improved cost of funding. On balance, collateral sourcing is constrained as net loan supply is down -55% in the US, and the ability to source in secondary is challenging for the arb due to strong technicals and lower WAS on vintage loans, but next year is expected to improve.”
Resets:
“Despite 79% of the universe being callable by 2023YE and 93% by 2024YE, it remains expensive to reset a CLO and there are limited refinancing candidates based on current spreads. There is $55bn of callable deal notional with a AAA margin that is wider than 180bps, of which 40% ($22bn) is wider than 220bps and are the most likely candidates (largely made up of late 2022/2023 vintage CLOs).”
Spreads:
“We expect our 160bps T1 AAA new issue spread target to be met by mid-year 2024. We introduce a 150bps bullish case if core PCE were to soften to below 3% in Q1, the labor market doesn’t break, and distress remains low. Our targets imply 10-20bps compression, which is reasonable given sizeable CLO pickup to corporates.”
Low-risk trade ideas:
T1 US CLO AA for 50-60bps spread pick-up to T2/T3 CLO AAA (minimal credit risk, limited liquidity give-up).
Higher-risk trade ideas:
Clean-profile US or Euro CLO BB (recent vintages), yielding 10-14% (some par subordination to credit risk, high carry).
We see better value in IG bonds from fully static CLOs, where we believe any upside potential is not fully priced in by the markets
BNP Paribas
Bank of America
US issuance:
$110bn (new)
$40bn (resets/refis)
European issuance:
€27bn (new)€12bn (resets/refis)
Middle market issuance:
$35bn (new)
Spreads:
“We expect tighter senior and range-bound junior spreads next year.”
Barclays
US issuance:
$100bn (new)
$40bn (resets/refis)
European issuance:
€20bn (new)
€10bn (resets/refis)
Middle market issuance:
$30bn (new)
Issuance:
“We expect low global BSL CLO issuance to persist in 2024. Although it is possible that demand from US banks returns (given recent trends in bank deposits and securities holdings, which could lead to further AAA tightening and improve BSL CLO NIM, which is still below pre-COVID levels), we believe an elevated loan default environment will hurt the PO component of the CLO arb (ie, CLO equity is first loss, and loan defaults hurt the ultimate return of principal). “Further, with yields in the low-to-mid teens, CLO BB expected returns are close to the historical expected returns of CLO equity, which also makes CLO creation less appealing.”
Spreads:
US BSL CLO AAAs – 145 to 155bps; EUR CLO AAAs 150 to 160bps; US BSL BBBs – 495-520bps; EUR CLO BBBs 550-575bps
Outlook:
“After the strong year of returns for CLOs, the question on every CLO investor’s mind is whether this performance is sustainable in 2024. We believe it is, further up the CLO capital stack, but we have doubts for CLOs rated BBB and below. Accordingly, we expect global CLO credit curve steepening (with respect to rating) in 2024.”
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Global credit funds & CLO's
January 2024 | Issue 260
Published in London & New York.
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