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June 2022 | Issue 246
News

Investors turn to secondary market amid recession fear

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Hugh Minch
Reporter
CLOs and loans weathered a sudden sell-off in May as investors began to factor in a higher likelihood of recession, according to market sources. But spread volatility of this nature means investors are finding better value in the secondary market.
Much of the first quarter of 2022 saw market participants benefit from a strong technical picture for CLOs and loans, with multiple weeks of $2 billion-plus record inflows into floating-rate loan mutual funds notched up in the first quarter as investors pivoted away from high yield. In May the same funds saw outflows of $1.6 billion.
CLO triple As have been the most heavily impacted liability tranche category, with deals in the new issue market seeing prospective yields in the low 180s, as Creditflux goes to press.
However, investors note that the dip across CLOs and loans is less pronounced than other asset classes. Some sources suggest that banks holding triple As on their balance sheet — and which saw those bonds retain their value — may be selling to pick up cheaper ABS products, or investment grade corporate credit or mortgages.
‘If you have a view on what the timing is for a recession, look at your portfolio and buy something safer that’s cheap,” says Stanton Ray, senior portfolio manager and head of the CLO platform at Columbia Threadneedle.
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“At the triple B point, we’ve seen pick-up on ugly days in the secondary markets’”
TJ Durkin, Head of structured credit | Angelo Gordon
TJ Durkin, head of structured credit at Angelo Gordon, says his firm finds more buying opportunities in the secondary CLO market than in primary.
“At the triple B point, we’ve seen meaningful pick-up on ugly days in the markets, where no one’s showing up to bid on some of the lists,” Durkin says. “It’s a bit more of a controlled process in the primary market, where buyers have more time to react.”
The sharp divergence between CLO liabilities and their loan assets is poised to lead to a slowdown in new deal formation in the near-term, though the supply drought should see liabilities tighten even if no new CLO triple A buyers emerge, Durkin says.
Declines for CLO liabilities were more intense than those of loans, with the Palmer Square CLO debt index losing 5.09% in May, while the S&P leveraged loan index returned negative 2.47%.
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Global credit funds & CLO's
June 2022 | Issue 246
Published in London & New York.
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