CL-slow: high volume, low speed securitization props up levloans in turbulent times
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LevFin

CL-slow: high volume, low speed securitization props up levloans in turbulent times

A tortoise overtakes a sleeping hare in a race. The hare and the tortoise. Illustration of a fable by Greek author Aesop. Copperplate etching drawn and engraved from life by Samuel Howitt from his own A New Work of Animals, Principally Designed from the F

Delayed execution could be an advantage for levloan borrowers as markets turn rough

High yield bond issuance has been wobbling over the past three weeks and was finally toppled by escalating tensions between Russia and Ukraine at the end of last week.

The prospect of rate increases by central banks, coupled with investor fears over inflation had already pushed many investors who can invest in both loans and bonds towards the former, a floating rate product.

However, the escalating tensions at the end of last week led to new issuance dying off completely as AnaCap and Prax Group both pulled their proposed notes, blaming adverse market conditions.

Given the similarities in the profiles of companies issuing high yield bonds and leveraged loans, it is surprising that leveraged loans have continued to be priced during this period, with both Modulaire and Cerba Healthcare closing deals on Monday.

The main factor behind this was the unusually high volume of CLO warehouses in the market — somewhere between 60 and 70 vehicles, according to sources.

This excess liquidity has flowed into the asset class, primarily from sources of private wealth such as family offices and high net worth individuals, according to one CLO manager. This capital needs to be put to work and the illiquid nature of the asset class means that it does not respond to news in the same way the bond market does.

“The CLO market is the principal buyer of leveraged loans and they don’t really trade names like bond investors do,” said one levfin banker. “It tends to be a bit of a laggard because it takes time to do the capital raising, asset gathering, warehousing, etc, and that money needs to be put to work.”

This delay has generally been seen as a negative for leveraged loans, because the asset class has been incapable of quickly responding to events that could affect the credit quality of the underlying businesses.

However, it could be argued that this reduced volatility provides continuity of corporate funding during a time of volatility in other markets that may not ultimately amount to more than a jitter.

It has also led to leveraged loan investors pushing back on terms that they may not have been able to in hotter markets. Covis Pharma, Group of Butchers and Altadia have all seen significant concessions made to investors with concerns about the underlying credit quality in recent weeks.

A more disciplined approach from investors, coupled with continued issuance through a time of increased volatility and uncertainty, should be seen as a positive as the wider picture turns ever darker.

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