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January 2023 | Issue 251

LDI funds prepare for return to CLOs and ABS early next year

Michelle D'Souza headshot
Michelle D’souza
Senior Reporter
Liability-driven investment (LDI) strategies that had to sell senior CLO tranches in droves could come back in for CLOs in the early part of 2023, sources say.
Owen Muller, who sits on NatWest Markets’ asset-backed products syndicate desk, says some investors which were selling large positions due to LDI-related outflows have already done a complete about turn and are now buying from various pockets.
“It’s hard to see why people dumping billions of bonds in the secondary market is a positive, but investors were surprised at how good the liquidity in the ABS and CLO market was, and I think that says a lot about the asset class,” he says.
Many LDI investors found better liquidity in ABS than corporate bonds, due to its floating rate nature and tenor, and they were able to raise cash quickly.
“What that does typically mean is that many may now be overweight corporates versus ABS in their portfolios,” he adds. “A couple of investors are suggesting they will be deploying more into ABS instead of corporates to balance that out, and even putting more in because liquidity was better than expected. It’s a good selling point to their underlying LP clients, too.”
“Investors were surprised by the liquidity in the ABS and CLO markets”
Owen Muller, VP, structured product syndication | NatWest Markets
Double As and single As have been harder to place in the past because of a natural gap in the investor base. Investors, however, are moving up the rating bracket due to higher all-in yields.
Investors might have to focus on secondary CLO markets because there is little happening in the new issue European CLO market.
Jonathan Butler, head of PGIM’s European leveraged finance team, says cashflow arbitrage is challenging for new deals, with a rally in loan assets in late November and liabilities not tightening much. In addition, the new issue loan pipeline is quiet given the small M&A pipeline.
“Lender expectations on the pricings they can achieve for their businesses are quite high and bar expectations are much lower,” says Butler.
“The quantum of leverage you can put into the deal today is lower because of the cost of debt, and so I think you’ll see a fairly slow start to 2023.”
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Global credit funds & CLO's
January 2023 | Issue 251
Published in London & New York.
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