European CLO market weathers liability-driven investment crisis as just 4% of b-wics fail to trade

Michelle D’souza

Senior reporter

Charlie Dinning

Data journalist

European CLO b-wic supply surged in September as liability-driven investment strategies sought to raise collateral via the floating rate CLO market. But amid the elevated supply, sources say the market was more orderly and liquidity was stronger than in March 2020, when entire lists went untraded.

In the three weeks of elevated selling during this period, just 4% of the €3.2 billion listed did not trade, according to CLO-i, compared to 46.5% in March 2020. Sources also praised market participants for releasing covers to keep everyone aware of levels.

Most of the paper to go up for sale was rated triple or double A, with these accounting for 70% of all sales. Double As led the way, totalling €1.2 billion or 38.8%.

On the back of elevated supply, double As began to trade in the mid-80s, sources say, but later leapt back up to the high-80s/low-90s.

Vitaliy Kozak, global co-head of CLO, ABS and CDO secondary trading at Citi, says although trading was better than during 2020 volatility, the number of line items was overwhelming and traders were not able to bid on every one.

“If you think about the number of line items during the day, which was in excess of 100, that’s a lot of analysis you need to do; [you need to] get the documents, talk to clients on every single bond, which takes a significant amount of time from bidders and dealers,” he says.

“If we had electronic trading in the CLO space, double A levels would likely not have got as low as the mid-80s because it would be more efficient to analyse and trade CLOs.”

“If we had electronic trading, double A levels would likely not have got as low”

Vitaliy Kozak, Global co-head of CLO, ABS and CDO secondary trading | Citi

Citi has partnered with six other banks to launch Octaura, an electronic loan and CLO trading platform. Kozak says the hope is to launch the loan trading platform later this year, with CLO trading beginning in 2023.

Not all double A-rated bonds were desirable, however, as fixed-rate notes were not easy to shift. €336.24 million of fixed-rate double As were listed over the three weeks and only €37.1 million traded, with only one cover released (85.4), according to Creditflux data.

Kozak says fixed-rate double As “traded around 5-7 points wider than floating rate bonds, with prices in the 70s and 80s, amid the higher demand in a rising rate environment”.

Of the €3.2 billion listed, €1.5 billion was auctioned in the first week (beginning 26 September), with only €80 million going untraded.

That one week accounted for more European CLO b-wic volumes than the previous 10 weeks combined.

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Global credit funds & CLO's

November 2022 | Issue 250

Published in London & New York.