Stunning January rally means CLOs are back in business

Hugh Minch

Senior Reporter

Longtime observers of the CLO market tell Creditflux they have “never seen the market move so quickly” after a rip-roaring January saw a spectacular rally in both loans and CLO debt.

Announcements for the first slate of new 2023 CLOs suggest the market is pricing triple A paper up to 50 basis points tight of December, while the S&P/LSTA leveraged loan index is up 1.4% since the turn of the year.

Market participants say the tone was set by positive economic data on inflation, jobs and manufacturing numbers.

“Piece by piece, we’re seeing a little bit of comfort coming in every day,” says Philip Raciti, head of performing credit and portfolio manager at Bardin Hill Investment Partners. “The inflationary data is coming back down, and underlying employment is holding, which is the perfect recipe for a soft landing.”

“We’re seeing a bit of comfort coming in every day”

Philip Raciti, Head of performing credit | Bardin Hill Investment Partners

The rally was felt particularly in senior CLO tranches, which many market participants believe were oversold in 2022. Investors are now highlighting the huge amount of income they’re earning on CLO bonds as three-month Libor edges closer to 5%.

“Credit is cheap, but it took time for the market to get comfortable for the next set of headlines to be positive,” says Raciti.

Investors are now speculating how long it will take for CLO triple As to tighten inside 150bp. Many have noted the particularly strong bid from regional Japanese banks, speculating that some buyers underspent in 2022 and have more deployments to make before their financial year comes to an end in April.

February could be a particularly busy month for CLO issuance, as managers take to the primary market to get a deal across the line during this window of opportunity.

“We’ve seen several o-wics in the past couple of days, which means CLO managers are in the market buying and trying to source assets,” says Jamil Nathoo, managing director at MidOcean Credit Partners.

“But it is a market where there is virtually no new issue and everyone’s trying to buy the same high-quality loans.”

Despite the bullish air, the market is not beyond recessionary risk, with analysts looking to the fourth quarter earnings season to assess the impact of higher interest rates on corporate balance sheets.

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Global credit funds & CLO's

February 2023 | Issue 252

Published in London & New York.