CLO issuers must not wait for a worse time
Spreads might tighten further, but assets tighten faster
The CLO market is at a thrilling stage — no deals have yet been priced, but everything seems possible. While other markets, like prime UK RMBS, began 2024 with issuing like it was going out of style, CLO managers and arrangers are still dreaming of all the spread tightening the new year may bring.
One manager, in pre-marketing for a deal that could come this month, said that achieving a spread on the triple-A rated notes of 165bp over three month Euribor would be disappointing. Things would only get interesting inside 160bp.
This might be a little ambitious for a first CLO of the year, given that spreads in the primary market were stuck between 170bp and 175bp for most of the fourth quarter of 2023.
Most predictions for a realistic first print land somewhere around 165bp, with tightening towards 160bp, maybe even 155bp over the first quarter.
For prospective issuers, it may be tempting to wait for their liabilities to tighten like that. But the asset side of their business will not stand still either.
Repayments of loans poured cash into the bank market just before Christmas, driving spreads tighter. New issuance is scarce. A few deals could come next week, but that may be it for January. Until the end of March, managers expect less than €20bn of loan issuance, and €12bn of that could be amend and extend deals.
Prices in the secondary loan market have surged close to a 12 month high and keep rising with little relief in sight, especially once CLO issuance picks up and several managers have to ramp up their portfolios. It seems unlikely that CLO spreads will tighten at the same pace.
Primary markets are in good health. Coming early in an uncrowded market is better than waiting for the chance of nicking a few basis points at the risk of paying up in a scrap for collateral.