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So long, summer: debt markets firing and the magic number for CLO spreads

◆ Issuers return with solid, but unspectacular deals ◆ CLOs promise a great reset ◆ China’s problems stay in China

Stacks of Wheat (End of Summer) by Claude Monet (1840-1926), oil on canvas, 1890/91

Issuance returned to multiple debt markets this week after the summer drought, with the sovereign, supranational and agency market and corporate bond markets seeing a spurt of trades.

While everything was orderly, there was a noticeable lack of pizzaz to many of the trades, with small books compared to historical averages and some issuers needing to pay higher than usual premiums.

This is not what the market wants to see before the September surge starts in earnest. The coming weeks are going to be packed with deals, and in an ideal world, borrowers would be going into this frenetic period knowing that order books are bulging and premiums are thin.

Meanwhile, in the CLO market, spreads are nearing their magic number. With spreads tightening around 25bp, and CLOs that priced last year taking the defensive measure of adding short non-call periods, a handful of CLOs are already looking to take advantage and reset their deals to a tighter spread.

However, for more CLOs to join the trend, spreads need to tighten by a little more. But once that happens, it’s off to the races for resets, and the market can expect to see a deluge of repricings in short order.

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