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News
Investors flock to CLOs as interest rates stay high
by Lisa Lee
A surge in demand from global investors combined with flat net supply has winnowed down yields in the USD 1.3tn CLO market. And the outlook is for another step down for spreads despite last month’s record issuance.
Investors from around the globe are increasingly purchasing CLOs. The big US banks — JP Morgan Chase, Citigroup and Bank of America — have resumed writing large cheques, according to market sources. Meanwhile, individual investors and the retail segment have pushed triple A ETFs to USD 10bn of assets.
“The investor base for CLO liabilities is broadening,” said Leland Hart, partner at Warwick Capital. “Among the drivers are a higher-for-longer interest-rate outlook, consensus for a soft landing, negative net supply of CLO paper and consistent relative value.”
New issue CLO AAA spreads (bps)
Japanese investors are ramping up, with new players exploring an entry in addition to traditional buyers increasing allocations. Korean investors are also showing appetite.
European banks are buying, with the Italians now in the mix, sources said. And the Middle East is becoming a focal point, with investors in that region said to be following First Abu Dhabi Bank, which has already purchased CLOs, according to sources.
All the interest has caused a sharp turnaround for CLO spreads. From the doldrums of 2023, when managers were fortunate to price US CLOs triple As at mid-170s, the same securities this month sold in the 140bps area. The story is similar in Europe, where triple A tranches priced in the region of 170bps last year, went down to 141bps last month, and are now being talked about as falling as low as 135bps in the near future.
“Honestly, we see it across all regions,” said Ariadna Stefanescu, co-head of Permira Credit, referring to CLO investor demand. “There were worries around the economic outlook last year. People now have faith in where the economy is going. Even with the ECB rate cut, European credit is attractive.”
Spread tightening isn’t driven by a lack of CLO issuance, which peaked to a monthly record in the US in May. The US saw USD 41.1bn of issuance last month, with new deals comprising nearly half the amount. Europe priced EUR 6.9bn of transactions, mostly new issuance. But despite managers furiously working to ply investors with deals, liquidations and amortisations have overwhelmed their efforts.
Net supply is flat to negative, according to market sources. Indeed, total US bank holdings of CLOs slipped nearly 3% last quarter, according to Bank of America Global Research. Given these dynamics, market sources believe spreads will only tighten further.
