Tightening spreads show market’s growing maturity

Tom Davidson

Managing editor

As another tumultuous year ends, we review how CLO spreads are looking around the world. In summary? Given current macroeconomic woes, the situation could have been much worse

As always, attention in 2023 has focused on the senior tranches in both the US and Europe, with a limited pool of buyers hindering any dramatic tightening. Luckily for the market, issuance was also limited, which helped spreads for broadly syndicated CLOs to rally.

At the start of the year, US BSL triple As were printing around SOFR plus 210bps, but by September and October tier one managers were pricing around 170bps. Since then, the market has widened out again a little, although many market participants attribute that more to technicals than fundamentals.

Sources point to the withdrawal of two key Japanese banks as they filled their annual allocation to the asset class. Stepping in to fill that gap we’ve seen interest from other global banks, such as NatWest, Capital One, RBC, and most recently Santander. Going into December, levels seemed to be settled around 175-180bps for the best managers.

CLO AAA primary DMs

Source: Creditflux

Casting the net wider in Europe

European triple As have been more range bound, with a mild rally across the year as a whole. According to Barclays in its end of year CLO outlook: “In Europe, we note that large asset managers and traditionally active investors across the cap stack have been reducing their participation size. However, this has led to managers casting a wider net among investors in placing their deals, particularly in AAAs.”

The other story of the year was the strong growth of middle market CLOs (or private credit CLOs as they are often called now). While triple-A spreads for that space look mainly flat on the year, that in itself is an impressive result, as issuance looks likely to almost double year-on-year. 2022 saw just $14bn of middle-market CLOs, while we’re already at $25bn this year.

CLO BB primary DMs

Source: Creditflux

Further down the stack, primary mezz paper also saw a rally, but a smaller one. As Barclays puts it: “At the bottom of the stack, the rally in spreads (as a percentage of starting spread) was more modest as the insurance bid faded for ratings BBB and below... Nevertheless, the hedge fund bid picked up here and supported lower-rated mezz valuations. These hedge funds were rewarded with returns rivalling equities driven by strong floating-rate coupon carry in a rising rate environment.”

The European market remains notably wider in junior mezz, and that gap seems to be widening. As usual it’s hard to unpick how much of that is technical, and how much based on the wider macroeconomic credit concerns in Europe versus the US, as well as the well-documented challenges the European loan market faces.

Share this article:

${prev-page}

${next-page}

Browse more Creditflux newsletters

Global credit funds & CLO's

January 2024 | Issue 260

Published in London & New York.