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Analysis CLOs
Taking stock after a long hot summer
by Tom Davidson & Ben Watson
As fall approaches, the global CLO and leveraged loan markets are in a strong position. But will records set in 2021 tumble? We compare the numbers — and find out what the market thinks
CLO market practitioners have been complaining they were busier than ever this summer. And they were — at least in the US. Broadly syndicated loan (BSL) CLO issuance in July and September outpaced even 2021. As a result, the US BSL market is catching up with that record year. This year’s total US BSL CLO issuance of USD 257bn is now only a few billion dollars behind the 2021 pace.
Will the market be able to keep up the pace and set a new record? Views on that are mixed. Citi’s Maggie Wang and Lijing Wang have raised their US CLO refi/reset target for the year from USD 180-200bn to USD 260-280bn. That would be considerably more than 2021’s USD 222bn, and make that overall record certain to fall.
YTD CLO issuance — 2024 vs 2021 ($bn)
Source: Creditflux and Debtwire
US BSL CLO issuance — 2024 vs 2021 ($bn)
Source: Creditflux and Debtwire
CLO triple A new-issue spreads (bps)
Source: Creditflux and Debtwire
But other voices are more sceptical. Citing higher volatility, the apparent unwinding of carry trades and rising US recession risks, Rishad Ahluwalia and Noelle Cooke, of JP Morgan’s CLO research team, revised US and European tier-1 triple A new issue spread targets to 150bps by the end of the year, up from 130bps, in their September update.
Since then the Federal Reserve Chair Jermone Powell sounded confident about the economy and taming inflation in his annual Jackson Hole speech, reassuring markets and hinting of a rate cut to come in September. But even if recession fears are declining again, macroeconomic uncertainty in a US election year is always high, and the global backdrop is particularly troubled.
If record issuance for the US BSL market looks possible, what about the bigger global issuance record? That seems like a taller ask, with European CLO issuance down some 40% compared with the 2021 total. The challenges Europe has faced this year are mainly on the supply side — see opposite. Senior spreads for European paper continue to undercut their US counterparts, and the latest market chatter is for that to continue into September.
US leveraged loans
A far from relaxing summer for everyone in the market
As the markets run into yet another dip on the back of poorer-than-expected US manufacturing data, September loan issuance shows the effect the last bump in the road had on the leveraged capital markets.
Loan activity shrunk to the lowest level in a year as the September volatility spike scared off any tentative issuers from the leveraged capital markets. Institutional issuance totalled USD 23bn over the month from 35 issuers, raising the year-to-date value to USD 819bn, which — despite the downturn — remains almost triple 2023’s activity by the same point in the year.
Sponsors continued to act as the instigator for the majority of the remaining institutional issuance, accounting for over two-thirds of the debt raised in September.
Of this amount, two deals went towards dividend recaps as sponsors continue to look for capital returns in a low M&A environment, which has made the normal exit routes via auction or listing significantly difficult.
The Ohio Valley Midstream joint venture raised a USD 600m term loan B to fund a shareholder repayment to owner CPPIB via CPPIB OVM Member, which owns a 35% stake in the midstream services firm. Additionally, Waupaca Foundry secured a USD 50m TLB to support a dividend to sponsor Monomoy Capital Partners.
This brings dividend recaps to USD 13.6bn for the year so far — a figure which is almost 2% of total institutional activity.
Defaults lose steam
Despite the low issuance volume and matching mood in the financial markets, there were no bankruptcy filings or missed payments registered over the month (up to 27 September), according to Fitch Ratings.
Monthly trailing 12-month bond defaults dropped to 2.1%, its lowest value in 18 months. Loan defaults stood at 4.25% in September.
Despite the decline in loan volumes, the dramatic pace of the CLO market continues to drive issuance. Also a driver of new issuance, yields in the loan market have continued to fall at a slow and steady rate, with single B rated institutional facilities at just over 9% and double B tranches at just under 8% on average, with margins sitting under 400bps.
In addition, there are significant upsides in the bond market outlook. Volumes didn’t suffer the same fall-off seen in loans in September, and they totalled a respectable USD 16.2bn. New money remains low at just 20% of the total USD 145bn raised in 2024 to date.
Despite the massive amount of refinancing that has occurred over the past year, there remains over USD 150bn to refinance in each of the next three years, rising to USD 234bn in 2028 and nearly USD 300bn in 2029.
US leveraged loan issuance by type ($bn)
US institutional loan issuance by source ($bn)
US loan margins (bps)
Source for all charts: Creditflux and Debtwire
Investors left, right and centre
The demand underpinning this year’s issuance comes from a number of sources. One is the simple fact that CLOs aren’t just being priced at a record pace, they’re also amortising and being called at a record rate. This returns capital, which investors can redeploy into new deals.
But that isn’t the only story. This year has also seen the return of many major investors, especially the US banks. JP Morgan and Citi ramped up their CLO triple A buying earlier in the year. Bank of America, which among the four US behemoths came last to CLO investing, significantly increased its buying in 2024. And the last holdout, Wells Fargo, is preparing to purchase CLOs again, according to market sources.
The big Japanese banks never went away, but they have been joined by smaller banks and insurance companies. The rapid strengthening of the Yen may change that, but Japanese banks set their budgets in April, and market sources consider it unlikely they will revise those numbers mid-year.
Demand is also strong at the top of the stack. As our cover story explains, structured credit investors are out raising money for CLO equity funds for the first time in years, and they seem to be having notable success.
European leveraged loans
Select few deals creep through in August as market prepares for tail end of the year
Typically the quietest month of the year, August did show a lack of issuance. Only EUR 1.2bn in leveraged loans and EUR 1bn in high-yield bonds were issued during the month. After the second quarter’s spike in activity to record levels, the third quarter is shaping up to set its own records on the other side of the spectrum.
The volatility spike at the beginning of September, though quickly recovered, highlights the volatile nature of the global capital markets. Overall, there appears to be positive sentiment towards a return to new money activity — spurred on by the rate cuts in Europe, encouraging comments from the Fed, and a pressing need for private equity firms to exit investments. However, that will all take some time to filter into the leveraged capital markets.
The only entries in September on the loans side were on the first day of the month for NextPharma’s refinancing and OGF’s amend-and-extend, totalling EUR 350m and EUR 716m, respectively; alongside an EUR 100m add-on for Datasite on 14 September.
Similarly, on the bond side, refinancings comprising a GBP 450m note from Ocado and a GBP 135m tap for Aston Martin added to September’s total as they both priced on the first day of the month. The remainder of the issuance comprised five Nordic deals totalling EUR 630m.
As such, the year-to-date figures are almost unchanged from last month’s leveraged highlights and year-on-year figures are just slightly lower across the board.
New CLO activity has outpaced new money institutional loan activity every quarter since 4Q22, serving as a further drive of future issuance for the loan market.
Signs of life
Institutional loans in the secondary market have also continued to show positive movements, with the average bid price rising to 98.3, marking a return to the stability seen in 2021 after a long consistent climb from 87.5 in October 2022. However, the number of repricings offered at or close to par present stabilisation and tightening towards 100 for the secondary market on average, potentially masking any real movements on existing loans.
As ever at the end of September, all eyes are forward to a return to activity in September.
98.3
Average bid price for institutional loans in the secondary market
European leveraged loan issuance (€bn)
European institutional loan issuance by source (€bn)
European loan margins (bps)
Source for all charts: Creditflux and Debtwire
