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April 2021 | Issue 233
News
Inflation fears add to allure of CLOs and keep fatigue at bay
Michelle D'Souza headshot
Michelle D’souza
Reporter
CLO debt investors took a breather in late March, but sources indicate a busy second quarter is in store.
CLO liabilities hit tights in February but credit moved wider in March on inflation fears. Although CLOs are attractive as they pay a floating rate, they also moved wider, with investors citing over-supply.
Push-back from investors has centred on short CLO tenors, which has caused term curves to flatten out: European triple A refi spreads widened from 60 basis points to 75bp in March, just 2bp inside the tightest new issues. Reset rollover rates also slumped, even for high-quality managers, with sources noting that many investors had filled their books for the quarter.
In the US, there is push-back against senior CLO tranches. Michelle Manuel, co-portfolio manager at Investec says triple A tights in US middle market CLO tranches, coupled with abundant supply, has caused some investors to wait.
“We’ve seen deals where the mezz got done surprisingly quickly but there was push-back on the triple As, with only 50% of them done on the 155bp price talk,” she says.
“There has only been a short period where triple As were below 80bp”
Jihan Saeed, Investment director | Permira Debt Managers
Last year, CLO investors who were net buyers were able to gain as junior CLO debt rallied from the 60s to par. These investors are now happy to go back into equity or higher yielding products, says Elena Rinaldi, portfolio manager at TwentyFour Asset Management. Creditflux reported that Apollo Global Management is among the firms to have crystallised gains it made on 2020 CLO investments.
But Rinaldi says that some investors who took a pause last year are returning. “Investors are focusing on floating rate products to protect against inflation, which makes CLOs extremely attractive,” she says.
Jihan Saeed, investment director at Permira Debt Managers, says demand is inevitable if you think of where triple As are pricing. “If you look at the whole European CLO 2.0 era, there has only been a short period where triple As were below 80bp,” she says. Managers and equity investors are therefore looking to lock in at these tights.
“There are also deals coming close to the end of their reinvestment period that couldn’t reset last year,” Saeed adds. “Even if they can’t achieve a tighter cost of capital, managers can extend the reinvestment period to give time for recovery on some covid-affected credits.”
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Global credit funds & CLO's
April 2021
| Issue 233
Published in London & New York.
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