Despite a roaring six weeks for the US CLO market in the lead-up to SFVegas, delegates at this year's conference say that the market will begin to slow heading into the summer — with total issuance for the year expected to finish between $100bn-$130bn.
January and February brought around $40bn of issuance already in BSL CLOs, according to data from KopenTech.
But, speaking on Monday afternoon at the CLO Market Beat panel at the conference at the Aria in Las Vegas, Neil Delap, fixed income credit research analyst at Wellington Management said that over the next few months the market would “slow down a bit”.
For CLOs to avoid a slowdown, there needs to be a pick-up in M&A activity, which should lift leverage loan issuance and thus provide a compelling case for more CLO issuance. One analyst told GlobalCapital that he thought issuance could even get closer to $150bn — as long as M&A activity picked up.
Yet this is where the ultra optimistic thesis falls.
“The problem is the loan market is slowing,“ said the analyst. “What activity there is is all repricings. Net new issuance is not growing and the market needs to find the collateral.”
Rather, the optimism is more gentle in nature.
This was also reflected in the audience surveys, with most suggesting that the US CLO market would remain in a kind of transition phase in 2024 as it continues to adapt to the higher interest rate environment. Indeed, 56% of delegates voting in the room where the panel took place said the BSL CLO market would not return to a “normal” level of functioning until 2025.
Jian Hu, managing director and head of new ratings for CLOs at Moody’s, did not put an estimate on issuance. But he said on the panel that the prospect of Fed rate cuts in the first half of the year was “diminishing”, and that a delay in rates coming down could lead to a a delay in further M&A activity.
Japanese becoming more predictable
On the demand side, panelist Nate Weber, a managing director in Mizuho’s CLO group, highlighting the changing approach from Japanese investors. These huge investment managers, which market participants say used to come and go from the market, are now becoming a steadier, reliable presence.
“Japan is active and they do care,” Weber said. “We’ve seen that, instead of three or four deals at once, they have now started to schedule and pace out the pipeline of investments to be one every two or three weeks.”
These Japanese investors are known to favor the triple-A tranches, and Weber said they were now looking to move up the “investment hierarchy” by booking bigger trades. “$20m-$30m is becoming $50m, $50m is becoming $100m, $100m is becoming anchor investor,” he added.
“They will continue to be very important buyers, but there won’t be a flood of cash that drives spreads, rather a constant flow.”