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News
Huge surge in BBB ETFs predicted to impact CLO pricing
by Paul Conley
While the growth of CLO AAA ETFs is grabbing headlines, a similar surge in ETFs buying mezz paper could have a bigger impact on pricing.
“Triple Bs are a lot more sensitive to the marginal bid because it’s a much smaller market and much more credit sensitive,” said Edwin Wilches, managing director and co-head of securitised products at PGIM Fixed Income.
In July, Janus Henderson announced that its B-BBB CLO ETF had grown to more than USD 1bn in assets under management. Other mezz-based ETFs are also growing quickly. Panagram’s BBB-B CLO ETF, for example, had USD 460m in AUM as of late July.
While those numbers are a fraction of the size of Janus Henderson’s USD 12bn AAA ETF, CLO BB/BBB debt makes up a much smaller proportion of the CLO universe as well. “They [BB/BBB CLOs] are closing in on 4% total market share,” said Wilches.
Komal Shahzad, senior vice president, CLO investing at PineBridge Investments, said in late July that it won’t be possible to gauge the impact of triple B ETFs unless the CLO market returns to a more normal interest-rate environment.
This is uncharted territory
John Kerschner
Head of US securitised products
Janus Henderson
“Triple Bs are a much smaller part of the market,” Shahzad said. “It also fits the risk appetite of fewer investors relative to triple A CLOs [because of] the relatively higher volatility within the triple B part of the cap stack. A lot of the attraction for this space has been the very high base rate effect. Current coupons are very compelling. We are cognisant that there could be some ‘tourist investors’ in the space that are only here for the current coupon or current yield. But that is not our understanding of the majority of these investors.”
So how big can the ETFs get? “This is uncharted territory,” said John Kerschner, head of US securitised products and portfolio manager at Janus Henderson. “It’s hard to say what it will be a year or two out, but near-term we don’t see this slowing down. We think the CLO ETF market could get to USD 30bn over time. Probably USD 20-25bn of that is triple A and the rest is the mezzanine part of the market.”
That USD 5bn could have a significant impact on triple Bs, says Wilches. “It has a much more meaningful knock-on effect in terms of relative value, in terms of just marginal bid, when these folks come in.”
In mid-June inflows were between USD 300m and USD 400m in the mezz, he says, and “we saw a buyer coming in trying to buy as many triple Bs as they could. Obviously that tightens up the market a lot when we see inflows, and it will widen it when outflows come.”
