Supply in US CLO primary markets in October will be “patchy”, with investors less willing to deploy capital following broader market volatility in rates and concerns about liquidity, a banker has said.
After a flurry of deals post-Labor Day, with 22 CLOs priced between September 4 and 22, activity has faded. This week, just three deals have been priced.
“There has always a little bit of a slowdown after the rush,” the banker said. “But with the broader market being volatile, it has come off quite a bit... and the middle market side is definitely feeling slower with ABS East 2023 coming up.”
IMN and FINN will host ABS East, their annual securitization conference, in Miami, on October 22-25.
Thanksgiving is traditionally the time for the primary market to begin hibernation before the new year, but the banker expects activity to be “dead” well before then. However, he does expect a number of tier two or three issuers to emerge before year-end, as they still need to reset or refinance existing transactions.
The challenge for smaller managers is to close the larger than usual gap between their recent pricing levels and tier one deals. In recent months it has not been unusual to see the triple-As on a tier one CLO price 50bp tighter than a debut manager, as shown in the graph using KopenTech data. Indeed, this year had only one month where the dispersion between the tightest and widest new issue US CLO triple-As was under 40bp until September.
“But that basis is starting to come back,” the manager said, evidenced by the graph showing the dispersion is edging towards 30bp for the first time since March. “It will not be 20bp any time soon, but nonetheless it is coming back.”
The manager argued that the broader discrepancy between the largest managers and the rest was driven by US banks not fully participating in senior notes yet, while some investors remain swayed by “brand value”. Local and regional banks in Japan are helping to make up for some missing US banks, said the manager, “but they are buying $5m-$20m — they are not buying the whole thing.”
“The market is thinner today, but it’s also wider than it was two to five years ago.”
With primary quietening down, the banker said those tier two or three issuers could find it “really ugly and painful” to do a reset before 2024.
Mind the gap
Nevertheless, the manager remained optimistic and said that brand value would matter less and less as time goes on, as there is more transparency and information around manager performance available to investors than ever.
“It matters less to the people who shop brands, but the numbers are the numbers and in the market we have now, with less ability to refinance loans, performance will matter a lot,” he said.
Meanwhile, rate market volatility appears to have caused a “drop off” in loan market prices, which the banker hopes will help more managers ramp a “good-quality, low-price dollar portfolio”.
“There is definitely a next wave coming,” the banker added, though this is not likely to emerge until the new year.