US loans recover but CLOs lag and issuance stutters

Hugh Minch

Reporter

The US leveraged loan market spent the latter half of March recovering losses from Russia’s invasion of Ukraine, with prices now above where they were when the war started.

The S&P/LSTA Leveraged Loan Index registered average bids of 97.98 points as Creditflux goes to press, having bottomed out at 95.88 points on 15 March. The last time the index was at this level was back on 23 February at 98.03. This retracement means US loans are posting year-to-date gains. It also means attention may shift to how rate hikes will affect US corporates.

The blip in loan pricing had a profound impact on CLO liabilities. First-pay tranches rose from 130bp to upwards of 150bp, and tenors shortened from five years to three. The pace of CLO new issuance also fell. The March total was only $11.65 billion in the US.

All asset classes were disrupted but CLO liabilities lagged other strategies, allowing some managers to issue ‘print and sprint’ transactions. However, this opportunity was brief, says Tetragon Credit Partners portfolio manager Dagmara Michalczuk.

“It will remain difficult to get a refinancing done given existing liability spreads”

Dagmara Michalczuk, Portfolio manager | Tetragon Credit Partners

“The secondary market hasn’t been stressed enough to make this a substantial and sustained buying opportunity,” she says. “Absent an unexpected change in the macro picture we’ll continue to move towards normalisation of new loan and CLO creation, though it will remain difficult to get a refinancing done given existing liability spreads.”

The rates environment is poised to drive demand for loans and CLOs in the near-term, with the Federal Reserve raising rates by 25bp in March in its first of six expected rate hikes.

Speaking on an LSTA-hosted webinar on the conflict, Barclays managing director Bradley Rogoff said existing issues with supply chains and inflation will be exacerbated.

“The leveraged loan market is somewhat domestic-focused,” he said. “If there’s de-globalisation, that’s going to hurt other markets more than leveraged loans.”

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Global credit funds & CLO's

April 2022 | Issue 244

Published in London & New York.