CLO market pushes on unfazed by election result
US CLO market players have quickly moved past the shock result of last week’s presidential election, refocusing on the US risk retention deadline on December 24.
“People are looking at the election as having more of an effect in the long term, but it’s really not impacting what we do day in and day out,” Kevin Kendra, managing director and head of the US Structured Credit group at Fitch Ratings, told GlobalCapital, adding that the market is preparing for the arrival of the new regulatory regime.
As the clock ticks down, the CLO market has continued to churn out deals. Despite the election, last week saw particularly heavy action in the refinancing and reset market.
A number of deals are still being marketed to investors, including a reset of 3i Debt Management’s 2012 transaction Jamestown CLO-1, which was announced last week.
“We are extremely busy working on a combination of CLO refinancing, resets and new CLO ratings,” Kendra said. “There is nothing that happened with the election last week that is going to have an immediate impact on the December 24 risk retention deadline.
“That date is a real date. Every manager is looking at a way to try to minimise their capital costs by issuing before the deadline, and any manager who can potentially execute on a refinancing, reset or new CLO will try to do so.”
Kendra predicts that the market will be fairly busy, though activity may begin to taper off towards the end of November, given that CLOs will have to close before December 24 in order to not be subject to risk retention.
He noted that the last of the new CLOs could price in the first week of December, and that after that managers would be focused on getting all of those transactions closed before the deadline. The pace of issuance in the weeks before the deadline could be sluggish as a result.
A buy-side analyst added that customers had been anxiously looking for answers to what could happen in the event of a Trump win. But he noted that, in the immediate aftermath, investors are still desperate to buy.
“Managers are focused on risk retention, so there is a lot going on in the market at the moment. I think the activity is a combination of the election results and the market reaction, along with higher yields,” he said, adding that many investors are in risk-on mode post-election, with spreads tightening on the back of lower supply.
The president-elect has struck a softer tone following his victory, spurring some optimism in the market. Trump’s talk of a stimulus and plans for renewed economic growth means that the result could actually be positive for the CLO market.
The analyst added that genuine economic recovery and growth would undoubtedly be a good thing for underlying credit, which would in turn be a benefit to the CLO market and continue to attract investors into US corporate credit.
“Trump is saying and doing the right things so far, so people are now for the first time in over a decade looking at the possibility of actually seeing some economic stimulus,” he added. “Besides monetary recovery, he could also cut some red tape and start to get things moving again. That has a huge impact on yields, rates and the economy as a whole.”
With the election result proving to be just a speed bump for the market, CLO managers are now at full throttle until December. Reset and refi deals are likely to continue, although there will probably be a slight slowdown, given that deals have to be done on a payment date that generally occurs in October and early November. That said, there will be more before the year’s end.
Despite the glut of refinancing, new issue investors will also probably have plenty of paper to buy before 2016 comes to a close.
“The expectation is that there will be several new issue deals that will be able to price and close before the end of the year and we are certainly working on a large number,” said Kendra. “Generally speaking, refinancing and reset deals are easier to execute than a new issue deal and that’s why we have seen a flurry of those being done pretty quickly, but I do think there will be a large number of new CLOs which will get priced as well.”