November 2021 | Issue 240
Analysis
CLOs
Refi deluge casts shadow on b-wics
Sayed Kadiri
Editor
Charlie Dinning
Data journalist
Refis and resets are cutting CLO lifespans short, which means there is less need to sell in the secondary market. Still, there are relative value opportunities in IG bonds and equity tranches
After a bumper 2020, secondary US CLO volumes have dropped back this year, with the sheer volume of CLO refinancings and resets hindering CLO trading.
As of the end of September, US CLO b-wic volumes reached $22.33 billion, according to CLO-i, compared to $36.81 billion at the same stage last year. In 2019, b-wic volumes registered $29.37 billion through the first nine months of the year.
Anna Farbiszewska, a director on MUFG’s CLO trading team, says that one of the reasons secondary market volumes have dropped off this year is that CLO investors have found other ways to de-risk. “Larger investors have done this by just not rolling as part of a refinancing or reset,” she says. “They’re effectively able to self-de-risk”.
A trader at another bank agrees, noting that the sell-side has also adapted to CLOs being reworked in the primary market. “It’s hard to replace inventory, so you end up keeping bonds you thought about selling,” says the New York-based trader.
Secondary CLO volumes hit $3.26 billion in January, the highest monthly total in 2021. This came in what was the lowest month for US CLO refis, resets and reissues ($11.3 billion across those three segments).
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Refis & resets heavily outweigh CLO trades in 2021
IG paper trading at a premium
The biggest drop-off this year has been in the trading of CLO paper rated single A to triple A. Secondary triple A CLO volumes have reached $7.06 billion in the first nine months of this year, compared to $15.98 billion at the same stage in 2020 and $11.24 billion in 2019.
IG CLO tranches have typically been trading at or above par in 2021, amid a glaring primary/secondary basis, which has persisted most of the year. There have been 1,684 trades of triple A to single A US CLO paper in the secondary market this year where cover levels have been disclosed, according to CLO-i. 1,196 of those bonds (71.1%) have traded at or above par.
“It feels like the market does not care what the coupon is,” says Farbiszewska, citing how low coupon IG bonds in secondary are trading much tighter than new issue.
“The duration argument does not stack up because there are a lot of shorter bonds available in the primary space from refinancing activity. So I have asked investors: if you have a triple-A bond trading at a premium and 15 basis points inside primary, why not sell that in secondary and buy new issue? They say they are net buying and that they are already losing enough paper to reset and refinancing activity.”
New issue CLOs crowd out b-wics
Attractive pricing in the new issue market has also diverted attention away from secondary CLOs. In the first half of 2021, some secondary bonds were still trading at a discount and new issue CLOs were exceptionally tight, with a few full duration triple As pricing inside 100bp. During that period some investors even chose to buy callable high coupon bonds.
$22bn
US CLO b-wics hit $22.33 billion in the first nine months of 2021; last year, they totalled $36.81 billion in that period
“The pipeline was so long and rating agencies were at their limits in terms of how much work they could take on, so some investors bought high coupon bonds at a slight premium to par on the expectation that these might not get called because of capacity issues,” says Farbiszewska. “This could have resulted in clipping an extra quarter of above-market coupon.”
In the second half of the year, value shifted to the primary CLO market but liquidity has been extremely strong, Farbiszewska says. “Dealers have had no problem buying entire lists. It has been a year of carry for the sell side as much as it has been for the buy side.”
“They say they are net buying and they are already losing enough paper to reset and refinancing activity”
Anna Farbiszewska, Director | MUFG
Amid the malaise, CLO equity trading has picked up this year: $2.68 billion this year versus $1.57 billion last year. Of late, there has been a flurry of control CLO equity positions hitting the secondary market. A trader says it is common for these to appear in the first month of a quarter to coincide with payment dates.
He says that an advantage of buying equity in secondary is greater visibility on cashflows versus a new issue.
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Global credit funds & CLO's
November 2021 | Issue 240
Published in London & New York.
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