Record January breeds optimism among US CLOs

Tom Davidson

Managing editor

January was a record-setting month for the CLO market, especially in the US, and market participants are positive about the rest of the quarter.

According to Creditflux data, the US saw a total of USD 15.4bn of issuance over the month, with USD 12.8bn of that coming from BSL CLOs. That represents the best January on record. In Europe, the year got off to a slower start, but still saw EUR 2.1bn of issuance.

Brad Larson, head of structured products at CIBC, says: “In January, it’s common for managers to wait and see where debt levels are settling before pricing a deal, but this year was different. We were out in the market with a deal just after 1 January.”

The drivers for January are now well rehearsed, with liability spreads dropping rapidly, leading to a turnaround in CLO arbitrage levels and the return of third-party equity. But CLO investors says it’s important not to get hung up on the arbitrage, and instead think about how CLO equity compares with other opportunities.

“It’s always about the relative value,” says Serhan Secmen, head of the US CLO platform at Napier Park Global Capital. “Last year you could get clean BBs in secondary for approximately a 1,000DM. With pull to par, that could potentially produce high teens returns. Now, if you consider the forward rate curve, BBs are in the high single digits. CLO equity is attractive again.”

“It’s always about the relative value”

Serhan Secmen, Head of US CLO platform | Napier Park

It doesn’t seem to matter that not everything in CLOs is rosy. Robert Klein, CIO of Structured Credit at Clarion Capital Partners, says: “The January rally was breathtaking. CLO CCC buckets are at their limit on aggregate, so there’s plenty to worry about. But based on last month, no one seems to be worrying.”

So what does the rest of the quarter hold? The market seems optimistic. Larson says: “Looking ahead, issuance will remain robust, but I don’t think February will maintain quite the pace we saw in January. Warehouses need to rebuild a bit, and today’s loan prices are higher than November and December.”

Investors are also positive about the two great drivers of CLO issuance, senior spreads and loan prices. Dagmara Michalczuk, co-chief investment officer at Tetragon, says: “A number of domestic banks which were previously active CLO investors have been focusing on building cash reserves. That should stop later in the year and help senior spreads tighten.”

And Secmen notes that for the last seven years every January has been black for loans, and every March has been red. “The next few months should be a good time for managers to fill their warehouses,” he says.

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