European CLO mezzanine spreads are exceptionally tight. Pricing on investment grade mezzanine notes in particular is nearing its tightest level in five years. These tight spreads have endured through August — historically a slower period for the CLO market.
Investors have piled into 19 deals so far this month, with spreads staying low despite the high volume of deals. Clearly, CLO mezzanine debt has pull for investors.
Pim van Schie, a portfolio manager at Neuberger Berman, spoke to GlobalCapital’s European CLO reporter Thomas Hopkins about why investors are increasing their allocations to CLO mezzanine tranches.
Van Schie discussed the higher spreads on CLO mezzanine notes relative to other equivalently rated bonds, which gives CLO paper strong relative value.
He also noted that new investors have invested in CLO mezzanine tranches through specialised funds, rather than directly.
The podcast also looks at investors’ concerns around collateral quality and the current dispersion in junior mezzanine pricing.
While there is some tiering in the spreads different CLO managers can achieve, the wider spreads on some managers’ deals might not justify the risk of investing in these deals.