February 2021 | Issue 231
News
US banks embrace CLOs again to drive spread compression
Hugh Minch
Reporter
The three big US bank-buyers of senior CLO tranches — Citi, JP Morgan and Wells Fargo — all returned to the market as investors in January after sitting out for much of 2020, according to market sources.
All three paused CLO investments following the coronavirus outbreak, with sources telling Creditflux that the firms did not get in on any primary market transactions in the third quarter, opting instead to reallocate resources in preparation for main street and consumer credit losses resulting from the pandemic. These banks now have plenty of cash to invest in markets such as CLOs.
Their return is beginning to drag senior CLO spreads tighter, with triple A levels falling 7.03 basis points in the secondary CLO market since 1 January, as Creditflux goes to press, but experts are projecting spread tightening will continue in coming weeks and months.
“The floating rate product is a smart place to be in an increasing rate environment”
David Moffitt, Co-head of US credit management | Investcorp
“Banks have to deploy capital and own assets, and they have a ton of cash on sheet that they need to invest,” says David Moffitt, co-head of US credit management at Investcorp.
Despite CLO spreads tightening, they are lagging the underlying loan assets, and are competing with retail funds for assets. Moffitt says this is not the right environment for CLOs to buy loans, and managers should wait for retail funds to pull out somewhat before investing — but he says that investors should allocate to floating rate products.
“The floating rate product is a smart place to be in an increasing rate environment,” says New York-based Moffitt. “The market always reaches an equilibrium with asset and liabilities equalising, and getting CLO equity to the low teens.”
While the US banks held back from the CLO primary market for less than 12 months, Japanese bank Norinchukin has been absent since March and has no plans to return in the near future, according to several sources.
As the world’s largest holder of CLOs with $71.03 billion (JPY 7.5 trillion) on its books as of September 2020, some market participants worry the bank will not maintain its positions in CLOs as they are refinanced. Many of its holdings are 2017 and 2018 vintage transactions.
Others have said that Nochu’s departure from CLOs has created space for domestic investors, which are keen to get their hands on paper while spreads remain relatively wide.
US CLO new issue spreads averaged 116bp for three-year reinvestment deals and 130.65bp for five-year transactions as Creditflux went to press.
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Global credit funds & CLO's
February 2021
| Issue 231
Published in London & New York.
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