Issuance of US collateralized loan obligations (CLOs), the main source of demand in the $1.4 trillion leveraged loan asset class, continued apace last week, with 10 new vehicles totaling more than $4 billion pricing, according to LCD, in what has been a white-hot February for the segment.
CLO issuance in the US could easily surpass the $129 billion seen in 2022. The record is $187 billion in 2021.
This activity brings the month-to-date total to $7.66 billion. That's roughly on pace with volume of $14.76 billion in all of February 2022, though last year’s momentum was derailed later in the first quarter by growing global macroeconomic volatility, Russia's invasion of Ukraine, and the first of eight consecutive interest rate hikes by the Federal Reserve that kicked off last March.
Analysts don’t yet see a similar wall ahead for the 2023 deal surge, which has coincided with growing market recognition of potential CLO returns in the current widened credit spread environment, alongside the deeply remote credit risk in CLO’s investment-grade rated tranches. This chart details the pricing/coupon on the highest-rated tranche of CLO vehicles issued since June 2022.
A CLO includes tranches of debt across the risk spectrum, often with equity at the bottom of the tranche stack.
As investor demand for CLOs has increased this year, the cost of originating a CLO vehicle has decreased. A number of vehicles recently have seen pricing on the highest-rated AAA tranche of a CLO at a spread of roughly 180 bps, a level not seen consistently in the market since June, according to LCD.
More information on how CLOs work, as well as historical CLO issuance data in both the US and Europe, is available via LCD's Leveraged Loan Primer.
This article originally appeared on PitchBook News
US CLO market picks up steam as weary investors eye yield
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