CLOs are back in business. Fears that the market could shut for weeks after the outbreak of war in Iran were misplaced.
The deal flow slowed briefly to a trickle. Now, not only are trades being printed again, but spreads are tightening. Arini priced the triple-A rated notes of its 10th new issue CLO in Europe at 128bp, 2bp inside where its ninth deal landed in March.
There’s a case for CLO debt. Reform of Solvency II is set to unlock a wave new demand from insurers. Floating rate instruments perhaps will get a bit of a boost from the uncertainty over inflation. Some of the worst case scenarios resulting from the war seem less likely since the shaky ceasefire agreement was made. The software sell-off has become more nuanced as investors weigh up the different business models of SaaS companies.
But the disruption from AI is still to take full effect and the Strait of Hormuz is still shut, so who would buy CLO equity?
Plenty of people, based on recent evidence. It was a tough start to the year for the asset class, with an enormous loan repricing wave squeezing the arbitrage and reducing options for managers to build par.
The loan market now looks more balanced. More loans are trading at prices in the 90s, where skillful managers should be able to find some value.
Thomas Hopkins gets into the finer details of how managers and investors are approaching the conditions on the podcast this week, while Tom Hall talks through how the England’s Renters’ Rights Act will affect the UK buy-to-let RMBS market.
