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Global credit funds & CLO's
November 2022 | Issue 250
Published in London & New York.
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November 2022 | Issue 250
CLO census

Weren’t there more of us than this?

Sam Robinson
Head of research
According to this year’s Creditflux CLO Census, the CLO industry is not feeling optimistic. Some investors have vanished and managers have not taken advantage of helpful market conditions
After a banner year for the CLO market in 2021, Creditflux CLO Census respondents were in a buoyant mood, with over 80% agreeing that the CLO arbitrage (for once) had been great. Their greatest concern was the impending transition from Libor to Sofr.
One year on, and Sofr has proven to be the least of the CLO market’s concerns. Global macro-economic instability following Russia’s invasion of Ukraine and the knock-on effects of the pandemic on global supply chains has plunged leveraged loan markets to stressed levels, while inflation has provoked sharp rises in interest rates.
Credit volatility brings a reluctance to invest in CLO tranches. According to the 2022 Creditflux CLO Census, which drew responses from a record 389 market participants, the biggest gripe is that there are not enough investors: 14.4% of respondents called for a broader investor base.
3.6% of respondents singled out regulatory concerns as an issue. These also constrain the investor base, with the National Association of Insurance Commissioners scrutinising CLO investments.
Issuance is well down on last year
The lack of investment grade buyers in Europe has slowed the market this year, while elevated spreads are dampening repricing. Issuance volumes stand at €26.7 billion year-to-date, compared to €79.6 billion at the same point last year. Creditflux recently reported that Japanese investor Norinchukin Bank had gone as far as backing out of certain CLO triple A tranches.
One respondent jibed at the limited audience for European CLOs. As part of the census, we asked who was the best senior CLO debt investor in Europe and this official quipped: “whoever is buying”.
We need delayed comp on primary loans
* Creditflux CLO league tables 2022 Q3 YTD
Still waiting for better b-wics
After the excitement of a turbulent year, it’s comforting to note some things don’t change. Respondents’ wishlists for the CLO industry still centre on perennial favourites: standardisation in documents and reform of the CLO b-wic process.
Despite extreme conditions, market volatility offered some upside to CLO managers, which were able to take advantage in the secondary market. In the US, our respondents thought Blackstone, Palmer Square and Elmwood were the firms which had taken greatest advantage of market volatility this year. These managers also occupy the top three spots in our US league tables for new issue pricing volumes.
Respondents satisfied with the transition to Sofr this year 90.3% of bankers and traders think the transition has gone smoothly
Although Blackstone is first for pricings, our census respondents were split between the CLO giant and Palmer Square for which has best taken advantage of volatility.
In Europe there was not a clear correlation between issuance and those managers that have made the best of volatility. Carlyle Group and CVC Credit Partners are the pick of the bunch, with 12.5% of the vote each, but neither has been especially prolific in the primary market this year.
However, Carlyle was the first manager to take advantage of loan prices to produce a rare print-and-sprint in Europe, and also managed to grow its assets under management through the acquisition of fellow manager CBAM. CVC followed suit with a print-and-sprint in August.

The jury is still out on whether CLO managers took full advantage of market volatility. 59.7% of our voters felt that in general the CLO market did not. This figure includes 63% of CLO bankers or traders, and 72.5% of CLO investors. Even among CLO managers, 53% felt that they had not made the most of market conditions.
Although there were windows within which canny managers were able to price selectively, much of the year has been characterised by a congested pipeline in an unfavourable pricing environment. When asked about the primary motivation for managers to issue a CLO this year, 34.1% of respondents thought managers were opportunistically taking advantage of cheap loans — but 44.2% thought the main factor was the desire for manager fees or for growth in AUM. One response summed this up by saying “print and sprints were opportunistic, others were driven by AUM”.
No shortage of things to worry about
There’s no shortage of concerns going into 2023, but of the options highlighted in our census, market participants were most worried about defaults (which garnered 23.3% of the vote), closely followed by downgrades (22.0%), and inflation and interest rates (21.6%). Although defaults have remained relatively steady in 2022, expectations for 2023 have deteriorated, with Fitch now predicting the US leveraged loan default rate will finish 2023 at 2-3% and 3% in Europe.
Different types of market participant had different concerns for the future. Service providers, bankers and traders were most worried about inflation and interest rates; CLO managers were concerned about downgrades; and CLO investors were preoccupied with defaults. Lack of investor participation was the fourth biggest worry overall and cropped up as the second biggest concern for CLO bankers and CLO managers, although it isn’t causing sleepless nights for CLO investors.
Loan settlements/agent banks are slow. Why do we still send faxes?
Another possible concern if conditions don’t materially improve is potential warehouse liquidations. When asked to predict the proportion of current warehouses that will be liquidated within the next year, 72.9% of respondents thought that less than a fifth of US CLO warehouses will be liquidated, while that figure was only 66.8% in Europe. In terms of the worst-case scenario, 14.6% of answers foresaw greater than 30% of US warehouses being liquidated, while that figure was 21.3% in Europe.
ESG label under scrutiny
ESG has become a buzzword in the CLO market. Last year’s census revealed that 64.8% of market participants thought CLOs should adopt ESG investment guidelines, and an ESG framework has become a staple of CLO marketing presentations. But the census results reveal a lack of belief that this translates into genuine results: 40.6% of responses indicate that only “some” managers that market themselves as ESG compliant are genuinely so, and 30.4% of replies said “very few” managers are actually compliant.
We need an exchange for loan trading. We are still operating as if in the 1980s
This was particularly apparent in the US, where the most common answer to which is the most ESG-aware manager was “no-one”. Last year’s winner in this category, Partners Group, came in with the second-most votes. In Europe, last year’s winner NIBC solidified its lead, picking up 26.7% of the votes. One answer claimed the firm “pioneered the ESG structure now replicated by other managers”. A number of respondents declined to highlight a particular manager, instead voting for any manager with an Article 8-aligned CLO.
Other firms that shone in this year’s census include JP Morgan, which finished in the top spot for four different arranger categories in the US, and Morgan Stanley, which was voted the most willing to make markets in both US and European CLO tranches. Oxford Funds was voted the best US CLO equity investor, with 53.1% of the vote and one response singling out portfolio manager Debdeep Maji by name.
Newcomer Dealscribe won a massive 70.4% of the vote in the new best CLO documents service category.
We need to figure out a solution to the mismatch of 3-month Sofr (liabilities) vs. 1-month Sofr (assets)
Much ado about nothing
If there’s one reason to be positive about CLOs, it’s the relatively uncomplicated transition to a new benchmark. Although one participant declared it “much ado about nothing”, another added a note of caution, commenting that the “litmus test will be in June 2023”.
Overall, 81.3% of voters declared themselves satisfied with the way the Sofr transition has been rolled out this year. This is in line with the 81.9% of people in last year’s census who were either neutral or optimistic about the benchmark switch. At that point though, it was still the biggest concern heading into 2022, with the third most common answer being that there was “nothing to worry about at all”. How little we knew what was to come.
  • The 2022 CLO Census was an online survey open for two weeks from 5-19 October. We received 389 responses, compared to 244 in 2021.
  • We asked respondents to indicate if they were a CLO manager, investor, banker/trader or service provider.
  • We vetted responses line-by-line and eliminated all cases where companies voted for themselves or for affiliates.
  • We would like to extend our thanks to the CLO community for their support.
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