Public ABS is on holiday but there’s been no summer break for the CLO market, despite the pleas of GlobalCapital’s CLO reporter Thomas Hopkins. Seven deals were priced last week and another already this week. Things might start to slow in August, but a total halt is unlikely.
Thomas’ argument isn’t (only) about having less work to do. A slowdown would be for managers own good. Relentless demand from CLOs and a lack of leveraged buyouts has driven loan prices tighter.
As a bonus, a bit of time away might allow tranche investors to build up some cash. That would prompt spread tightening and helping sort out the challenge of weak arbitrage.
Not that much spread tightening is needed on the mezz. Triple-As are stuck with most deals between 120bp-130bp, while everything from double-B to double-A is close to its historical tights.
As the largest part of the capital structure, triple-As are the most important part of the stack for managers weighted average cost of capital. That means how tight the senior spread can go has a big impact on how the arbitrage turns out.
There’s a different buyer base for seniors, which makes the balance of supply and demand even more important in determining spreads. A lot of demand at the top of the stack comes from banks, which might be less driven than asset managers or hedge funds to take advantage of relative value opportunities.
But even if the public deals do dry up, it’s no guarantee of a holiday. There’s been plenty happening in ABS to keep Tom Hall busy, from an unusual data centre deal to new funding lines for bridging to the collapse of another specialist lender.
Listen to the podcast here.
