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May 2021 | Issue 234
Supply/demand technical forces CLO spreads to shoot wide
Hugh Minch
CLO spreads defied positive economic conditions and blew out in March and April. The widening came despite ample liquidity and investors looking to rotate into floating rate assets.
Some investors, beginning the year flush with cash, deployed all their allocated funds amid record supply in the first quarter. Sources say Phoenix-based Western Alliance Bank, for instance, began the year with $500 million to invest in double and single A-rated CLO notes and was fully allocated by March, causing spreads on those tranches to gap out early in the month.
Some of the big triple A buyers, including Bank of America and State Street, are also rumoured to have scaled down the pace of their investments in recent weeks.
Triple A spreads in the US primary market are 12.5 basis points wide of their early March tights as Creditflux goes to press. Mezzanine debt tranches were wider by 25-27bp depending on the rating band.
Young Choi, portfolio manager at King Street Capital Management, pins the widening on heavy supply in the first quarter of the year.
“Major investors started to become much more selective”
Young Choi, Portfolio manager | King Street Capital Management
“If you spoke to the major investors during that period they were all saying similar things — I have so many deals in front of me and I don’t have enough time to actually look at all of them,” Choi says. “They started to become much more selective in what they looked at, and were passing on a number, which caused spreads to back up.”
John Wright, co-head of North American liquid and structured credit at Bain Capital Credit, says that spreads for most credit assets are tight of their historical averages, which makes CLOs even more attractive.
“Heavy supply is causing a bit of widening pressure relative to where spreads probably should be from a fundamental perspective,” Wright says.
“Spreads today for CLO liabilities are wider because of the heavy supply dynamic, and we don’t see that supply abating in the short-term, given how many deals have their non-calls rolling off later this year.”
The first slate of post-covid CLOs, most of them one-year non-call, are dripping into the refi or reset market. GoldenTree, Partners and Onex were among those to reset such transactions last month.
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Global credit funds & CLO's
May 2021 | Issue 234
Published in London & New York.
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