Beginning in the middle of last year, JP Morgan CLO analysts recommended buying CLOs over high yield loans and bonds. In the year over year period, CLO triple-Bs and double-Bs have returned 12.6% and 24.6% respectively, compared to 6.9% returns for high yield loans and 10.7% for high yield corporate bonds.
The analysts point out that CLO mezzanine debt returns are more in line with equities, with the S&P 500 returning 13.1% and the Nasdaq seeing returns of 23.8% in the past year.
CLOs have reaped the benefits of rising Libor and what the analysts call a "pull to par" in the loan market as discounted loans pay off or refinance at par. They go on to say, however, that they do not expect the CLO market to outperform for much longer.
“The direction of travel seems wider. We are less concerned around North Korea…and more around dovish inflation data and yield-curve flattening (weaker floating rate trade), with supply also a risk to spreads,” the analysts write, noting that US CLO issuance volume has hit a monthly average of $10bn so far this year.
But if supply is a concern, it has yet to materialise in the post-Labor Day pipeline. Speaking with GlobalCapital on Tuesday, a buy-side analyst said that his calendar for the coming weeks was strangely quiet considering that September has traditional been a time when issuers flock to the market. He chalked this up to an unusually busy August.
“I think ultimately things will pick up, but my pipeline was wiped out in August. There was so much issuance in the first three weeks of the month and now the calendar looks weaker than it has in a while,” the analyst said.
August was the second busiest month for CLO issuance in 2017. Managers sold $10bn across 21 deals during the month, as the wave of CLO refinancings subsided and a softer loan market made it easier to source new collateral.