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CLOs face higher delinquencies, say managers

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More issuers might need extensions from investors

CLO managers are expecting higher default rates and slower deal flow amid market volatility, they said at IMN's ABS East conference in Miami on Monday.

The rising rate environment and global uncertainties have changed the market narrative, according to panelists. Deals have slowed down, and the market has been seeing longer deals — compared to more short-term deals that were more common in the beginning of the year, they said.

“We definitely saw, back in July, print and sprints,” said Craig Stein, partner at Schulte Roth & Zabel. “Maybe there'll be another window of opportunity before the end of the year, although that might be a bit optimistic.”

Last year was a record-breaking year for CLOs with over $403bn in issuance with low delinquencies, but the market has been nowhere near as active this year.

Panelists said that they have originally expected an increase in delinquencies for this year, and they agreed that there is likely to be a 2% to 3% delinquency rate for CLO deals going forward.

Some part of this delinquencies would occur due to issuers negotiating with the existing holder base for an extension.

“You're already starting to see some of these come to the market in terms of amend and extends to get issuers over the hump,” said Adrienne Dale Burns, managing director and US CLO portfolio manager at Onex Credit.

Burns said that when there are solid holding companies that need more time to bridge a gap, “in many instances, lenders will be pretty responsive and open to negotiation and open to doing an amendment extend”.

However, when it comes to issuers who are facing serious liquidity problems and weak earnings quarter over quarter, delinquencies are becoming more alarming for CLO investors, she added.

“I think, for managers, printing right now, a lot of the deals are driven by risk management,” said Olga Chernova, chief investment officer at Sancus Capital Management.

Even with wider spreads, CLOs have been an important tool for issuers to help manage negative credit migration and downgrades, according to Chernova.

Due to market volatility and the ongoing deal volume, the panelists said they expect to end the year with around $120bn-$125bn of broadly syndicated issuance.

According to data from Finsight, there's been $106bn of broadly syndicated CLO issuance in the US so far in 2022.