Easy gains of 2022 won’t be repeated but shorted-dated CLOs could still have upside

Tom Davidson

Managing editor

The latest trend to hit the US market is the pricing of short-dated CLOs. Palmer Square and BlackRock both priced CLOs with one-year reinvestment periods, and Nuveen printed a Symphony CLO with a two-year reinvestment period.

But the market seems divided over whether more short-dated deals will follow. One manager says: “No manager would ever want to do one of these.”

The counter viewpoint looks instead at the outstanding success of last year’s short-dated deals. As they reset in a much narrower spread environment, that vintage promises to be one of the best performing in years.

“A lot of managers and investors view the optionality of a one-year non-call period as really valuable,” notes Lauren Basmadjian, co-head of liquid credit and head of US loans & structured credit at Carlyle.

“Last year’s CLOs with short reinvestment periods have had great returns, so they will be hoping to recreate that.”

“Last year’s CLOs with short reinvestment periods have had great returns”

Lauren Basmadjian, Managing director | Carlyle Group

According to one manager, the easy gains from 2022 won’t be entirely replicable now that the loan market has rallied. But with many loans trading around 98, there could still be a little upside left for equity investors in a short-dated deal, even if it gets called instead of refinanced.

The three CLOs that priced recently saw senior liabilities in the mid to high 150s — quite a bit tighter than other recent deals. According to one investor, that is due to strong demand for shorter-dated paper from certain large money managers.

The managers that have priced so far are all at the larger end of the spectrum, but otherwise quite different. Palmer Square is known for its static CLO business, but it is also an active manager of US deals with longer reinvestment periods. BlackRock is one of the largest CLO managers in the world, and has already priced six new deals in 2023. In recent years it has stuck with transactions with longer reinvestment periods.

The move is perhaps least surprising from Nuveen, a manager that frequently takes a flexible approach, often issuing print-and-sprints to lock in favourable terms. In May this year it priced Symphony CLO XXX, which also had a one-year non-call period (alongside a three-year reinvestment period).

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Global credit funds & CLO's

October 2023 | Issue 258

Published in London & New York.